OTHER  PEOPLE'S  MONEY 

AND  HOW  THE  BANKERS  USE  IT 


OTHER  PEOPLE'S  MONEY 

AND  HOW  THE  BANKERS  USE  IT 


BY 

LOUIS  D.  BRANDELS 


NEW  YORK 

FREDERICK  A.  STOKES  COMPANY 

PUBLISHERS 


Copyright,  1913,  1914,  by 
The  McClure  Pubijcations 


Copyright,  1914,  by 
Frederick  A.  Stokes  Company 


All  rights  reserved 


H6- 


n 


March,  19H 


PREFACE 

While  Louis  D.  Brandeis's  series  of  articles 
on  the  money  trust  was  running  in  Harper's 
Weekly  many  inquiries  came  about  publication 
in  more  accessible  permanent  form.  Even  with- 
out such  urgence  through  the  mail,  however,  it 
would  have  been  clear  that  these  articles  inevit- 
ably constituted  a  book,  since  they  embodied  an 
analysis  and  a  narrative  by  that  mind  which,  on 
the  great  industrial  movements  of  our  era,  is  the 
most  expert  in  the  United  States.  The  inquiries 
meant  that  the  attentive  public  recognized  that 
here  was  a  contribution  to  history.  Here  was  the 
clearest  and  most  profound  treatment  ever 
published  on  that  part  of  our  business  develop- 
ment which,  as  President  Wilson  and  other  wise 
men  have  said,  has  come  to  constitute  the  greatest 
of  our  problems.  The  story  of  our  time  is  the 
story  of  industry.  No  scholar  of  the  future  will 
be  able  to  describe  our  era  with  authority  unless 
he  comprehends  that  expansion  and  concentration 
which  followed  the  harnessing  of  steam  and  elec- 
tricity, the  great  uses  of  the  change,  and  the  great 


vi  PREFACE 

excesses.  No  historian  of  the  future,  in  my  opin- 
ion, will  find  among  our  contemporary  documents 
so  masterful  an  analysis  of  why  concentration 
went  astray.  I  am  but  one  among  many  who 
look  upon  jMr.  Brandeis  as  having,  in  the  field  of 
economics,  the  most  inventive  and  sound  mind 
of  our  time.  While  his  articles  were  running  in 
Harper's  Weekly  I  had  ample  opportunity  to 
know  how  widespread  was  the  belief  among 
intelligent  men  that  this  brilliant  diagnosis  of 
our  money  trust  was  the  most  important  contri- 
bution to  current  thought  in  many  years. 

"Great"  is  one  of  the  words  that  I  do  not  use 
loosely,  and  I  look  upon  Mr.  Brandeis  as  a  great 
man.  In  the  composition  of  his  intellect,  one 
of  the  most  important  elements  is  his  compre- 
hension of  figures.  As  one  of  the  leading  finan- 
ciers of  the  country  said  to  me,  "Mr.  Brandeis's 
greatness  as  a  lawyer  is  part  of  his  greatness  as 
a  mathematician."  My  views  on  this  subject 
are  sufficiently  indicated  in  the  following  edito- 
rial in  Harper's  Weekly. 

ARITHMETIC 

About  five  years  before  tlic  Metropolitan  Traction 
Compunj'  of  New  York  went  into  tlie  hands  of  a  receiver, 
Mr.  Bnindeis  came  down  from  lioston,  and  in  a  speech  at 
Cooper  Union  prophesied  that  that  company  must  fail, 


PREFACE  vii 

Leading  bankers  in  New  York  and  Boston  were  heartily 
recommending  the  stock  to  their  customers.  Mr.  Brandeis 
made  his  prophecy  merely  by  analyzing  the  published 
figures.  How  did  he  win  in  the  Pinchot-Glavis-Ballinger 
controversy?  In  various  ways,  no  doubt;  but  perhaps  the 
most  critical  step  was  when  he  calculated  just  how  long  it 
would  take  a  fast  worker  to  go  through  the  Glavis-Ballinger 
record  and  make  a  judgment  of  it;  whereupon  he  decided 
that  Mr.  Wickersham  could  not  have  made  his  report  at 
the  time  it  was  stated  to  have  been  made,  and  therefore  it 
must  have  been  predated. 

Most  of  Mr.  Brandeis's  other  contributions  to  current 
history  have  involved  arithmetic.  When  he  succeeded  in 
preventing  a  raise  in  freight  rates,  it  was  through  an  exact 
analysis  of  cost.  When  he  got  Savings  Bank  Insurance 
started  in  Massachusetts,  it  was  by  being  able  to  figure  what 
insurance  ought  to  cost.  When  he  made  the  best  contract 
between  a  city  and  a  public  utility  that  exists  in  this  country, 
a  definite  grasp  of  the  gas  business  was  necessary — com- 
bined, of  course,  with  the  wisdom  and  originality  that  make 
a  statesman.  He  could  not  have  invented  the  preferential 
shop  if  that  new  idea  had  not  been  founded  on  a  precise 
knowledge  of  the  conditions  in  the  garment  trades.  When 
he  established  before  the  United  States  Supreme  Court  the 
constitutionality  of  legislation  affecting  women  only,  he 
relied  much  less  upon  reason  than  upon  the  amount  of  knowl- 
edge displayed  of  what  actually  happens  to  women  when 
they  are  overworked — which,  while  not  arithmetic,  is  built 
on  the  same  intellectual  quality.  Nearly  two  years  before 
Mr.  Mellen  resigned  from  the  New  Haven  Railroad,  Mr. 
Brandeis  wrote  to  the  present  editor  of  this  paper  a  private 
letter  in  which  he  said: 

"When  the  New  Haven  reduces  its  dividends  and  Mellen 
resigns,  the  '  Decline  of  New  Haven  and  Fall  of  Mellen'  will 


viii  PREFACE 

make  a  dramatic  story  of  human  interest  with  a  moral — or 
two — including  the  evils  of  private  monopoly.  Events  can- 
not be  long  deferred,  and  possibly  you  may  want  to  prepare 
for  their  coming. 

"Anticipating  the  future  a  little,  I  suggest  the  following 
as  an  epitaph  or  obituary  notice: 

"Mellen  was  a  masterful  man,  resourceful,  courageous, 
broad  of  view.  He  fired  the  imagination  of  New  England; 
but,  being  obUque  of  vision,  merely  distorted  its  judgment 
and  silenced  its  conscience.  For  a  while  he  trampled  with 
impunity  on  laws  human  and  divine;  but,  as  he  was  obsessed 
with  the  delusion  that  two  and  two  make  five,  he  fell,  at 
last,  a  victim  to  the  relentless  rules  of  humble  arithmetic. 

'"Remember,  O  Stranger,  Arithmetic  is  the  first  of  the 
sciences  and  the  mother  of  safety.'" 

The  exposure  of  the  bad  jBnancial  management 
of  the  New  Haven  raikoad,  more  than  any- 
other  one  thing,  led  to  the  exposure  and  com- 
prehension of  the  wasteful  methods  of  big  busi- 
ness all  over  the  country  and  that  exposure  of 
the  New  Haven  was  the  almost  single-handed 
work  of  Mr.  Brandeis.  He  is  a  person  who 
fights  against  any  odds  while  it  is  necessary 
to  fight  and  stops  fighting  as  soon  as  the  fight 
is  won.  For  a  long  time  very  respectable  and 
honest  leaders  of  finance  said  that  his  charges 
against  the  New  Haven  were  unsound  and  in- 
excusable. He  kept  ahead.  A  year  before  the 
actual  crash  came,  however,  he  ceased  worrying, 
for  he  knew  the  work  had  been  carried  far  enough 


PREFACE  ix 

to  complete  itself.  When  someone  asked  him 
to  take  part  in  some  little  controversy  shortly 
before  the  collapse,  he  replied,  ''That  fight  does 
not  need  me  any  longer.  Time  and  arithmetic 
will  do  the  rest." 

This  grasp  of  the  concrete  is  combined  in  Mr. 
Brandeis  with  an  equally  distinguished  grasp  of 
bearing  and  significance.  His  imagination  is  as 
notable  as  his  understanding  of  business.  In 
those  accomplishments  which  have  given  him  his 
place  in  American  life,  the  two  sides  of  his  mind 
have  worked  together.  The  arrangement  be- 
tween the  Gas  Company  and  the  City  of  Boston 
rests  on  one  of  the  guiding  principles  of  Mr. 
Brandeis' s  life,  that  no  contract  is  good  that  is 
not  advantageous  to  both  parties  to  it.  Behind 
his  understanding  of  the  methods  of  obtaining 
insurance  and  the  proper  cost  of  it  to  the  laboring 
man  lay  a  philosophy  of  the  vast  advantage  to 
the  fibre  and  energy  of  the  community  that  would 
come  from  devising  methods  by  which  the  labor- 
ing classes  could  make  themselves  comfortable 
through  their  whole  lives  and  thus  perhaps  mak- 
ing unnecessary  elaborate  systems  of  state  help. 
The  most  important  ideas  put  forth  in  the 
Armstrong  Committee  Report  on  insurance  had 
been    previously    suggested    by    Mr.    Brandeis, 


X  PREFACE 

acting  as  counsel  for  the  Equitable  policy 
holders.  Business  and  the  more  important 
statesmanship  were  intimately  combined  in  the 
management  of  the  Protocol  in  New  York, 
which  has  done  so  much  to  improve  condi- 
tions in  the  clothing  industry.  The  welfare 
of  the  laborer  and  his  relation  to  his  employer 
seems  to  ]\Ir.  Brandeis,  as  it  does  to  all  the 
most  competent  thinkers  today,  to  constitute 
the  most  important  question  we  have  to  solve, 
and  he  won  the  case,  coming  up  to  the  Supreme 
Court  of  the  United  States,  from  Oregon,  estab- 
lishing the  constitutionality  of  special  protective 
legislation  for  women.  In  the  IMinimum  Wage 
case,  also  from  the  State  of  Oregon,  which  is 
about  to  be  heard  before  the  Supreme  Court,  he 
takes  up  what  is  really  a  logical  sequence  of  the 
limitation  of  women's  hours  in  certain  industries, 
since  it  would  be  a  futile  performance  to  limit 
their  hours  and  then  allow  their  wages  to  be  cut 
down  in  consequence.  These  industrial  activities 
are  in  large  part  an  expression  of  liis  deep  and 
ever  growing  sympathy  with  the  working  people 
and  understanding  of  them.  Florence  Kelley 
once  said:  "No  man  since  Lincoln  has  understood 
the  common  people  as  Louis  Brandies  does." 


PREFACE  xi 

While  the  majority  of  Mr.  Brandeis's  great 
progressive  achievements  have  been  connected 
with  the  industrial  system,  some  have  been  polit- 
ical in  a  more  limited  sense.  I  worked  with  him 
through  the  Ballinger-Pinchot  controversy,  and 
I  never  saw  a  grasp  of  detail  more  brilliantly 
combined  with  high  constructive  ethical  and 
political  thinking.  After  the  man  who  knew 
most  about  the  details  of  the  Interior  Depart- 
ment had  been  cross-examined  by  Mr.  Brandeis 
he  came  and  sat  down  by  me  and  said:  "Mr. 
Hapgood,  I  have  no  respect  for  you.  I  do  not 
think  your  motives  in  this  agitation  are  good 
motives,  but  I  want  to  say  that  you  have  a 
wonderful  lawyer.  He  knows  as  much  about 
the  Interior  Department  today  as  I  do."  In 
that  controversy,  the  power  of  the  administra- 
tion and  of  the  ruling  forces  in  the  House  and 
Senate  were  combined  to  protect  Secretary 
Ballinger  and  prevent  the  truth  from  coming 
to  light.  Mr.  Brandeis,  in  leading  the  fight  or 
the  conservation  side,  was  constantly  haunted 
by  the  idea  that  there  was  a  mystery  somewhere. 
The  editorial  printed  above  hints  at  how  ho 
solved  the  mystery,  but  it  would  require  much 
more  space  to  tell  the  other  sides,  the  enthus- 
iasm for  conservation,  the  convincing  arguments 


xii  PREFACE 

for  higher  standards  in  office,  the  connection 
of  this  conspiracy  with  the  country's  larger 
needs.  Seldom  is  an  audience  at  a  hearing  so 
moved  as  it  was  by  Mr.  Brandeis's  final  plea  to 
the  committee. 

Possibly  his  work  on  railroads  will  turn  out  to  be 
the  most  significant  among  the  many  things  Mr. 
Brandeis  has  done.  His  arguments  in  1910-11 
before  the  Interstate  Commerce  Commission 
against  the  raising  of  rates,  on  the  ground  that 
the  way  for  railroads  to  be  more  prosperous  was 
to  be  more  efficient,  made  efficiency  a  national 
idea.  It  is  a  cardinal  point  in  his  philosophy 
that  the  only  real  progress  toward  a  higher  na- 
tional life  will  come  through  efficiency  in  all  our 
activities.  The  seventy-eight  questions  addressed 
to  the  railroads  by  the  Interstate  Commerce 
Commission  in  December,  1913,  embody  what 
is  probably  the  most  comprehensive  embodiment 
of  his  thought  on  the  subject. 

On  nothing  has  he  ever  worked  harder  than  on 
his  diagnosis  of  the  Money  Trust,  and  when  his 
life  comes  to  be  written  (I  hope  many  years  hence) 
this  will  be  ranked  with  his  railroad  work  for 
its  effect  in  accelerating  industrial  changes.  It 
is  indeed  more  than  a  coincidence  that  so  many 
of  the  things  he  has  been  contending  for  have 


PREFACE  xiii 

come  to  pass.  It  is  seldom  that  one  man  puts 
one  idea,  not  to  say  many  ideas,  effectively 
before  the  world,  but  it  is  no  exaggeration  to  say 
that  Mr.  Brandeis  is  responsible  for  the  now  wide- 
spread recognition  of  the  inherent  weakness  of 
great  size.  He  was  the  first  person  who  set  forth 
effectively  the  doctrine  that  there  is  a  limit  to  the 
size  of  greatest  efficiency,  and  the  successful  demon- 
stration of  that  truth  is  a  profound  contribu- 
tion to  the  subject  of  trusts.  The  demonstration 
is  powerfully  put  in  his  testimony  before  the 
Senate  Committee  in  1911,  and  it  is  powerfully 
put  in  this  volume.  In  destroying  the  delusion 
that  efficiency  was  a  common  incident  of  size,  he 
emphasized  the  possibility  of  efficiency  through 
intensive  development  of  the  individual,  thus 
connecting  this  principle  with  his  whole  study  of 
efficiency,  and  pointing  the  way  to  industrial 
democracy. 

Not  less  notable  than  the  intellect  and  the 
constructive  ability  that  have  gone  into  Mr. 
Brandeis' s  work  are  the  exceptional  moral  quali- 
ties. Any  powerful  and  entirely  sincere  crusader 
must  sacrifice  much.  Mr.  Brandeis  has  sacrificed 
much  in  money,  in  agreeableness  of  social  life, 
in  effort,  and  he  has  done  it  for  principle  and  for 
human  happiness.     His  power  of  intensive  work, 


xiv  PREFACE 

his  sustained  interest  and  will,  and  his  courage 
have  been  necessary  for  leadership.  No  man 
could  have  done  what  he  has  done  without 
being  willing  to  devote  his  life  to  making  his 
dreams  come  true. 

Nor  should  anyone  make  the  mistake,  because 
the  labors  of  Mr.  Brandeis  and  others  have  re- 
cently brought  about  changes,  that  the  system 
which  was  being  attacked  has  been  undermined. 
The  currency  bill  has  been  passed,  and  as  these 
words  are  written,  it  looks  as  if  a  group  of  trust 
bills  would  be  passed.  But  systems  are  not 
ended  in  a  day.  Of  the  truths  which  are  embod- 
ied in  the  essays  printed  in  this  book,  some  are 
being  carried  out  now,  but  it  will  be  many,  many 
years  before  the  whole  idea  can  be  made  effective; 
and  there  will,  therefore,  be  many,  many  years 
during  which  active  citizens  will  be  struggling  for 
those  principles  which  are  here  so  clearly,  so 
eloquently,  so  conclusively  set  forth. 

The  articles  reprinted  here  were  all  written 

before  November,  1913.     "The  Failure  of  Banker 

Management"    appeared    in    Harper's    Weekly 

Aug.  IG,  1913;  the  other  articles,  between  Nov. 

22,  1913  and  Dec.  17,  1914. 

Norman  Hapgood. 
March,  1914. 


CONTENTS 

CHAPTER  PAGE 

I  Our  Financial  Oligarchy 1 

II  How  THE  Combiners  Combine 28 

III  Interlocking  Directorates 51 

IV  Serve  One  Master  Only! 69 

V  What  Publicity  Can  Do 92 

VI  Where  the  Banker  is  Superfluous  .    .109 
VII  Big  Men  and  Little  Business    .    .    .    .135 

VIII  A  Curse  of  Bigness 162 

IX  The  Failure  of  Banker- management  .    .   189 
X  The  Inefficiency  of  the  Oligarchs  .    .   201 


XV 


OTHER  PEOPLE'S  MONEY 

AND   HOW  THE  BANKERS  USE  IT 

CHAPTER  I 
OUR  FINANCIAL  OLIGARCHY 

President  Wilson,  when  Governor,  declared 
in  1911: 

"The  great  monopoly  in  this  country  is  the 
money  monopoly.  So  long  as  that  exists,  our 
old  variety  and  freedom  and  individual  energy  of 
development  are  out  of  the  question.  A  great 
industrial  nation  is  controlled  by  its  system  of 
credit.  Our  system  of  credit  is  concentrated. 
The  growth  of  the  nation,  therefore,  and  all  our 
activities  are  in  the  hands  of  a  few  men,  who, 
even  if  their  actions  be  honest  and  intended  for 
the  public  interest,  are  necessarily  concentrated 
upon  the  great  undertakings  in  which  their  own 
money  is  involved  and  who,  necessarily,  by  every 
reason  of  their  own  limitations,  chill  and  check 
and  destroy  genuine  economic  freedom.  This 
is  the  greatest  question  of  all;  and  to  this,  states- 


2  OTHER  PEOPLE'S  MONEY 

men  must  address  themselves  with  an  earnest 
determination  to  serve  the  long  future  and  the 
true  hberties  of  men." 

The  Pujo  Committee — appointed  in  1912 — 
found : 

"Far  more  dangerous  than  all  that  has  hap- 
pened to  us  in  the  past  in  the  way  of  ehmination 
of  competition  in  industry  is  the  control  of  credit 
through  the  domination  of  these  groups  over  our 
banks  and  industries."   .    .    . 

"Whether  under  a  different  currency  system 
the  resources  in  our  banks  would  be  greater  or 
less  is  comparatively  immaterial  if  they  continue 
to  be  controlled  by  a  small  group."   .    .    . 

"It  is  impossible  that  there  should  be  compe- 
tition with  all  the  facilities  for  raising  money  or 
selling  large  issues  of  bonds  in  the  hands  of  these 
few  bankers  and  their  partners  and  allies,  who 
together  dominate  the  financial  policies  of  most 
of  the  existing  systems.  .  .  .  The  acts  of  this 
inner  group,  as  here  described,  have  nevertheless 
been  more  destructive  of  competition  than  any- 
thing accomplished  by  the  trusts,  for  they  strike 
at  the  very  vitals  of  potential  competition  in 
every  industry  that  is  under  their  protection,  a 
condition  which  if  permitted  to  continue,   will 


OUR  FINANCIAL  OLIGARCHY         3 

render  impossible  all  attempts  to  restore  nor- 
mal competitive  conditions  in  the  industrial 
world.    .    .    . 

"If  the  arteries  of  credit  now  clogged  well-nigh 
to  choking  by  the  obstructions  created  through 
the  control  of  these  groups  are  opened  so  that  they 
may  be  permitted  freely  to  play  their  important 
part  in  the  financial  system,  competition  in  large 
enterprises  will  become  possible  and  business  can 
be  conducted  on  its  merits  instead  of  being  sub- 
ject to  the  tribute  and  the  good  will  of  this  hand- 
ful of  self-constituted  trustees  of  the  national 
prosperity." 

The  promise  of  New  Freedom  was  joyously 
proclaimed  in  1913. 

The  facts  which  the  Pujo  Investigating  Com- 
mittee and  its  able  Counsel,  Mr.  Samuel  Unter- 
myer,  have  laid  before  the  country,  show  clearly 
the  means  by  which  a  few  men  control  the  busi- 
ness of  America.  The  report  proposes  meas- 
ures which  promise  some  relief.  Additional  reme- 
dies will  be  proposed.  Congress  will  soon  be 
called  upon  to  act. 

How  shall  the  emancipation  be  wrought?  On 
what  lines  shall  we  proceed?  The  facts,  when 
fully  understood,  will  teach  us. 


4  OTHER  PEOPLE'S  MONEY 

THE    DOMINANT    ELEMENT 

The  dominant  element  in  our  financial  oli- 
garchy is  the  investment  banker.  Associated 
banks,  trust  companies  and  life  insurance  com- 
panies are  his  tools.  Controlled  railroads,  public 
service  and  industrial  corporations  are  his  sub- 
jects. Though  properly  but  middlemen,  these 
bankers  bestride  as  masters  America's  business 
world,  so  that  practically  no  large  enterprise  can 
be  undertaken  successfully  without  their  partici- 
pation or  approval.  These  bankers  are,  of 
course,  able  men  possessed  of  large  fortunes; 
but  the  most  potent  factor  in  their  control  of 
business  is  not  the  possession  of  extraordinary 
ability  or  huge  wealth.  The  key  to  their  power  is 
Combination — concentration  intensive  and  com- 
prehensive— advancing  on  three  distinct  lines: 

First:  There  is  the  obvious  consolidation  of 
banks  and  trust  companies;  the  less  obvious 
afhliations — through  stockholdings,  voting  trusts 
and  interlocking  directorates — of  banking  insti- 
tutions which  are  not  legally  connected;  and 
the  joint  transactions,  gentlemen's  agreements, 
and  "banking  ethics"  which  eliminate  competi- 
tion among  the  investment  bankers. 

Second:  There  is  the  consolidation  of  railroads 
into   huge   systems,    the   large   combinations   of 


OUR  FINANCIAL  OLIGARCHY         5 

public  service  corporations  and  the  formation  of 
industrial  trusts,  which,  by  making  businesses  so 
"big"  that  local,  independent  banking  concerns 
cannot  alone  supply  the  necessary  funds,  has 
created  dependence  upon  the  associated  New 
York  bankers. 

But  combination,  however  intensive,  along 
these  lines  only,  could  not  have  produced  the 
Money  Trust — another  and  more  potent  factor 
of  combination  was  added. 

Third:  Investment  bankers,  like  J.  P.  Morgan 
&  Co.,  dealers  in  bonds,  stocks  and  notes,  en- 
croached upon  the  functions  of  the  three  other 
classes  of  corporations  with  which  their  business 
brought  them  into  contact.  They  became  the 
directing  power  in  railroads,  public  service  and 
industrial  companies  through  which  our  great 
business  operations  are  conducted — the  makers 
of  bonds  and  stocks.  They  became  the  directing 
power  in  the  life  insurance  companies,  and  other 
corporate  reservoirs  of  the  people's  savings — the 
buyers  of  bonds  and  stocks.  They  became  the 
directing  power  also  in  banks  and  trust  companies 
— the  depositaries  of  the  quick  capital  of  the  coun- 
try— the  life  blood  of  business,  with  which  they 
and  others  carried  on  their  operations.  Thus 
four  distinct  functions,  each  essential  to  business. 


6  OTHER  PEOPLE'S  MONEY 

and  each  exercised,  originall}",  by  a  distinct  set  of 
men,  became  united  in  the  investment  banker. 
It  is  to  this  union  of  business  functions  that  the 
existence  of  the  Money  Trust  is  mainly  due.* 

The  development  of  our  financial  oligarchy 
followed,  in  this  respect,  lines  with  which  the 
history  of  political  despotism  has  familiarized  us : 
— usurpation,  proceeding  by  gradual  encroach- 
ment rather  than  by  violent  acts;  subtle  and 
often  long-concealed  concentration  of  distinct 
functions,  which  are  beneficent  when  separately 
administered,  and  dangerous  onl}"  when  combined 
in  the  same  persons.  It  was  by  processes  such 
as  these  that  Caisar  Augustus  became  master  of 
Rome.  The  makers  of  our  own  Constitution 
had  in  mind  Uke  dangers  to  our  political  liberty 
when  they  provided  so  carefully  for  the  separation 
of  governmental  powers. 

THE  PROPER  SPHERE  OF  THE  INVESTMENT 
BANKER 

The  original  function  of  the  investment  banker 
was  that  of  dealer  in  bonds,  stocks  and  notes; 
buying  mainly  at  wholesale   from   corporations, 

*ObviousIj'  only  a  few  of  (ho  invest nicrit  bimkors  oxor- 
risc  this  Krcat  power;  but  many  othors  i)erf(jrin  important  func- 
tions in  the  eystem,  as  hereinafter  described. 


OUR  FINANCIAL  OLIGARCHY         7 

muDicipalities,  states  and  governments  which 
need  money,  and  selHng  to  those  seeking  invest- 
ments. The  banker  performs,  in  this  respect,  the 
function  of  a  merchant;  and  the  function  is  a 
very  useful  one.  Large  business  enterprises  are 
conducted  generally  by  corporations.  The  per- 
manent capital  of  corporations  is  represented  by 
bonds  and  stocks.  The  bonds  and  stocks  of  the 
more  important  corporations  are  owned,  in  large 
part,  by  small  investors,  who  do  not  participate 
in  the  management  of  the  company.  Corpora- 
tions require  the  aid  of  a  banker-middleman, 
for  they  lack  generally  the  reputation  and  clien- 
tele essential  to  selling  their  own  bonds  and  stocks 
direct  to  the  investor.  Investors  in  corporate 
securities,  also,  require  the  services  of  a  banker- 
middleman.  The  number  of  securities  upon  the 
market  is  very  large.  Only  a  part  of  these  se- 
curities is  listed  on  the  New  York  Stock  Ex- 
change; but  its  listings  alone  comprise  about 
sixteen  hundred  different  issues  aggregating 
about  $26,500,000,000,  and  each  year  new  list- 
ings are  made  averaging  about  two  hundred 
and  thu-ty-three  to  an  amount  of  $1,500,000,000. 
For  a  small  investor  to  make  an  intelligent  selec- 
tion from  these  many  corporate  securities — in- 
deed, to  pass  an  intelligent   judgment  upon   a 


8  OTHER  PEOPLE'S  MONEY 

single  one — is  ordinarily  impossible.  He  lacks  the 
abilit}',  the  facilities,  the  training  and  the  time 
essential  to  a  proper  investigation.  Unless  his 
purchase  is  to  be  little  better  than  a  gamble,  he 
needs  the  advice  of  an  expert,  who,  combining 
special  knowledge  with  judgment,  has  the  facil- 
ities and  incentive  to  make  a  thorough  investiga- 
tion. This  dependence,  both  of  corporations  and 
of  investors,  upon  the  banker  has  grown  in  recent 
years,  since  women  and  others  who  do  not  par- 
ticipate in  the  management,  have  become  the 
owners  of  so  large  a  part  of  the  stocks  and  bonds 
of  our  great  corporations.  Over  half  of  the 
stockholders  of  the  American  Sugar  Refining 
Company  and  nearly  half  of  the  stockholders  of 
the  Pennsylvania  RaUroad  and  of  the  New  York, 
New  Haven  &  Hartford  Railroad  are  women. 

Good- will — the  possession  by  a  dealer  of  num- 
erous and  valuable  regular  customers — is  always 
an  important  element  in  merchandising.  But  in 
the  business  of  selling  bonds  and  stocks,  it  is  of 
exceptional  value,  for  the  very  reason  that  the 
small  investor  relics  so  largely  upon  the  banker's 
judgment.  This  confidential  relation  of  the 
banker  to  customers — and  the  knowledge  of  the 
customers'  private  afTairs  acquired  incidentally — 


OUR  FINANCIAL  OLIGARCHY  9 

is  often  a  determining  factor  in  the  marketing  of 
securities.  With  the  advent  of  Big  Business 
such  good-will  possessed  by  the  older  banking 
houses,  preeminently  J.  P.  Morgan  &  Co.  and 
their  Philadelphia  House  called  Drexel  &  Co., 
by  Lee,  Higginson  &  Co.  and  Kidder,  Peabody, 
&  Co.  of  Boston,  and  by  Kuhn,  Loeb  &  Co.  of 
New  York,  became  of  enhanced  importance. 
The  volume  of  new  security  issues  was  greatly 
increased  by  huge  railroad  consolidations,  the 
development  of  the  holding  companies,  and  par- 
ticularly by  the  formation  of  industrial  trusts. 
The  rapidly  accumulating  savings  of  our  people 
sought  investment.  The  field  of  operations  for 
the  dealer  in  securities  was  thus  much  enlarged. 
And,  as  the  securities  were  new  and  untried,  the 
services  of  the  investment  banker  were  in  great 
demand,  and  his  powers  and  profits  increased 
accordingly. 

CONTROLLING   THE    SECURITY   MAKERS 

But  this  enlargement  of  their  legitimate  field 
of  operations  did  not  satisfy  investment  bankers. 
They  were  not  content  merely  to  deal  in  securities. 
They  desired  to  manufacture  them  also.  They 
became  promoters,  or  allied  themselves  with 
promoters.     Thus  it  was  that  J.  P.  Morgan  <fe 


10  OTHER  PEOPLE'S  MONEY 

Company  formed  the  Steel  Trust,  the  Harvester 
Trust  and  the  Shipping  Trust.  And,  adding  the 
duties  of  undertaker  to  those  of  midwife,  the 
investment  bankers  became,  in  times  of  corporate 
disaster,  members  of  security-holders'  "Pro- 
tective Committees";  then  they  participated  as 
"Reorganization  Managers"  in  the  reincarnation 
of  the  unsuccessful  corporations  and  ultimately 
became  directors.  It  was  in  this  way  that  the 
Morgan  associates  acquired  their  hold  upon  the 
Southern  Railway,  the  Northern  Pacific,  the 
Reading,  the  Erie,  the  Pere  Marquette,  the 
Chicago  and  Great  Western,  and  the  Cincinnati, 
Hamilton  &  Dayton.  Often  they  insured  the 
continuance  of  such  control  by  the  device  of  the 
voting  trust;  but  even  where  no  voting  trust  was 
created,  a  secure  hold  was  acquired  upon  re- 
organization. It  was  in  this  way  also  that  Kuhn, 
Loeb  &  Co.  became  potent  in  the  Union  Pacific 
and  in  the  Baltimore  &  Ohio. 

But  the  banker's  participation  in  the  manage- 
ment of  corporations  was  not  limited  to  cases 
of  promotion  or  reorganization.  An  urgent  or 
extensive  need  of  new  money  was  considered  a 
BufTicicnt  reason  for  the  banker's  entering  a 
board  of  directors.  Often  without  even  such 
excuse   the   investment    banker   has   secured    a 


OUR  FINANCIAL  OLIGARCHY        11 

place  upon  the  Board  of  Directors,  through  his 
powerful  influence  or  the  control  of  his  customers' 
proxies.  Such  seems  to  have  been  the  fatal  en- 
trance of  Mr.  Morgan  into  the  management  of 
the  then  prosperous  New  York,  New  Haven  & 
Hartford  Railroad,  in  1892.  When  once  a 
banker  has  entered  the  Board — whatever  may 
have  been  the  occasion — his  grip  proves  tena- 
cious and  his  influence  usually  supreme;  for  he 
controls  the  supply  of  new  money. 

The  investment  banker  is  naturally  on  the 
lookout  for  good  bargains  in  bonds  and  stocks. 
Like  other  merchants,  he  wants  to  buy  his 
merchandise  cheap.  But  when  he  becomes  di- 
rector of  a  corporation,  he  occupies  a  position 
which  prevents  the  transaction  by  which  he 
acquires  its  corporate  securities  from  being 
properly  called  a  bargain.  Can  there  be  real 
bargaining  where  the  same  man  is  on  both  sides 
of  a  trade?  The  investment  banker,  through  his 
controlling  influence  on  the  Board  of  Directors, 
decides  that  the  corporation  shall  issue  and  sell 
the  securities,  decides  the  price  at  which  it  shall 
sell  them,  and  decides  that  it  shall  sell  the 
securities  to  himself.  The  fact  that  there  are 
other  directors  besides  the  banker  on  the  Board 


12  OTHER  PEOPLE'S  MONEY 

does  not,  in  practice,  prevent  this  being  the  result. 
The  banker,  who  holds  the  purse-strings,  becomes 
usually  the  dominant  spirit.  Through  voting- 
trusteeships,  exclusive  financial  agencies,  mem- 
bership on  executive  or  finance  committees,  or  by 
mere  directorships,  J.  P.  Morgan  &  Co.,  and  their 
associates,  held  such  financial  power  in  at  least 
thirty-two  transportation  systems,  public  utility 
corporations  and  industrial  companies — com- 
panies with  an  aggregate  capitalization  of  S17,- 
273,000,000.  IMainly  for  corporations  so  con- 
trolled, J.  P.  Morgan  &  Co.  procured  the  public 
marketing  in  ten  years  of  security  issues  aggre- 
gating $1,950,000^,000.  This  huge  sum  does  not 
include  any  issues  marketed  privately,  nor  any 
issues,  however  mai'keted,  of  intra-state  cor- 
porations. Kuhn,  Loeb  &  Co.  and  a  few  other 
investment  bankers  exercise  similar  control  over 
many  other  corporations. 

CONTROLLING    SECURITY  BUYERS 

Such  control  of  railroads,  public  service  and 
industrial  corporations  assures  to  the  investment 
bankers  an  ample  supply  of  securities  at  attract- 
ive prices;  and  merchandise  well  bought  is  half 
sold.  But  these  bond  and  stock  merchants  are 
not  disposed  to  take  even  a  slight  risk  as  to  their 


OUR  FINANCIAL  OLIGARCHY        13 

ability  to  market  their  goods.  They  saw  that  if 
they  could  control  the  security-buyers,  as  well  as 
the  security-makers,  investment  banking  would, 
indeed,  be  "a  happy  hunting  ground";  and  they 
have  made  it  so. 

The  numerous  small  investors  cannot,  in  the 
strict  sense,  be  controlled;  but  their  dependence 
upon  the  banker  insures  their  being  duly  in- 
fluenced. A  large  part,  however,  of  all  bonds 
issued  and  of  many  stocks  are  bought  by  the 
prominent  corporate  investors;  and  most  promi- 
nent among  these  are  the  life  insurance  companies, 
the  trust  companies,  and  the  banks.  The  purchase 
of  a  security  by  these  institutions  not  only  relieves 
the  banker  of  the  merchandise,  but  recommends 
it  strongly  to  the  small  investor,  who  believes 
that  these  institutions  are  wisely  managed.  These 
controlled  corporate  investors  are  not  only  large 
customers,  but  may  be  particularly  accommo- 
dating ones.  Individual  investors  are  moody. 
They  buy  only  when  they  want  to  do  so.  They 
are  sometimes  inconveniently  reluctant.  Cor- 
porate investors,  if  controlled,  may  be  made  to 
buy  when  the  bankers  need  a  market.  It  was 
natural  that  the  investment  bankers  proceeded  to 
get  control  of  the  great  life  insurance  companies, 
as  well  as  of  the  trust  companies  and  the  banks. 


14  OTHER  PEOPLE'S  MONEY 

The  field  thus  occupied  is  uncommonly  rich. 
The  life  insurance  companies  are  our  leading 
institutions  for  savings.  Their  huge  surplus  and 
reserves,  augmented  daily,  are  always  clamoring 
for  investment.  No  panic  or  money  shortage 
stops  the  inflow  of  new  money  from  the  perennial 
stream  of  premiums  on  existing  policies  and  inter- 
est on  existing  investments.  The  three  great 
companies — the  New  York  Life,  the  Mutual  of 
New  York,  and  the  Equitable — would  have  over 
$55,000,000  of  new  money  to  invest  annually, 
even  if  they  did  not  issue  a  single  new  policy. 
In  1904 — just  before  the  Armstrong  investiga- 
tion— these  three  companies  had  together  $1,247,- 
331,738.18  of  assets.  They  had  issued  in  that 
year  $1,025,671,126  of  new  poUcies.  The  New 
York  legislature  placed  in  1906  certain  restrictions 
upon  their  growth;  so  that  their  new  business 
since  has  averaged  $547,384,212,  or  only  fifty- 
three  per  cent,  of  what  it  was  in  1904.  But  the 
aggregate  assets  of  these  companies  increased  in 
the  last  eight  years  to  $1,817,052,260.36.  At  the 
time  of  the  Armstrong  investigation  the  average 
age  of  these  tliree  companies  was  fifty-six  years. 
The  growth  of  assets  in  the  last  eight  years  was  about 
half  as  large  as  the  total  growth  in  the  preceding 
fifty-six    years.     These    three    companies    must 


OUR  FINANCIAL  OLIGARCHY        15 

invest  annually  about  $70,000,000  of  new  money; 
and  besides,  many  old  investments  expire  or  are 
changed  and  the  proceeds  must  be  reinvested.  A 
large  part  of  all  life  insurance  surplus  and  re- 
serves are  invested  in  bonds.  The  aggregate 
bond  investments  of  these  three  companies  on 
January  1,  1913,  was  $1,019,153,268.93. 

It  was  natural  that  the  investment  bankers 
should  seek  to  control  these  never-failing  reser- 
voirs of  capital.  George  W.  Perkins  was  Vice- 
President  of  the  New  York  Life,  the  largest  of 
the  companies.  While  remaining  such  he  was 
made  a  partner  in  J.  P.  Morgan  &  Co.,  and  in 
the  four  years  preceding  the  Armstrong  investi- 
gation, his  firm  sold  the  New  York  Life  $38,804, 
918.51  in  securities.  The  New  York  Life  is  a 
mutual  company,  supposed  to  be  controlled  by 
its  policy-holders.  But,  as  the  Pujo  Committee 
funds  'Hhe  so-called  control  of  life  insurance  com- 
panies by  policy-holders  through  mutualization 
is  a  farce"  and  "its  only  result  is  to  keep  in 
office  a  self-constituted,  self-perpetuating  man- 
agement." 

The  Equitable  Life  Assurance  Society  is  a 
stock  company  and  is  controlled  by  $100,000  of 
stock.  The  dividend  on  this  stock  is  limited  by 
law  to  seven  per  cent.;  but  in  1910  Mr.  Morgan 


16  OTHER  PEOPLE'S  MONEY 

paid  about  S3, 000,000  for  $51,000,  par  value  of 
this  stock,  or  S5,SS2.35  a  share.  The  dividend 
return  on  the  stock  investment  is  less  than  one- 
eighth  of  one  per  cent. ;  but  the  assets  controlled 
amount  now  to  over  $500,000,000.  And  certain 
of  these  assets  had  an  especial  value  for  invest- 
ment bankers; — namely,  the  large  holdings  of 
stock  in  banks  and  trust  companies. 

The  Armstrong  investigation  disclosed  the 
extent  of  financial  power  exerted  through  the 
insurance  company  holdings  of  bank  and  trust 
company  stock.  The  Committee  recommended 
legislation  compelling  the  insurance  companies 
to  dispose  of  the  stock  within  five  years.  A  law 
to  that  effect  was  enacted,  but  the  time  was  later 
extended.  The  companies  then  disposed  of  a 
part  of  theu"  bank  and  trust  company  stocks; 
but,  as  the  insurance  companies  were  controlled 
by  the  investment  bankers,  these  gentlemen 
sold  the  bank  and  trust  company  stocks  to 
themselves. 

Referring  to  such  purchases  from  the  Mutual 
Life,  as  well  as  from  the  Equitable,  the  Pujo 
Committee  found: 

"Here,  then,  were  stocks  of  fiv'e  important 
trui-t  companies  and  one  of  our  largest  national 


OUR  FINANCIAL  OLIGARCHY        17 

banks  in  New  York  City  that  had  been  held  by 
these  two  life  insurance  companies.  Within 
five  years  all  of  these  stocks,  so  far  as  distributed 
by  the  insurance  companies,  have  found  their 
way  into  the  hands  of  the  men  who  virtually  con- 
trolled or  were  identified  with  the  management 
of  the  insurance  companies  or  of  their  close  allies 
and  associates,  to  that  extent  thus  further  en- 
trenching them." 

The  banks  and  trust  companies  are  deposi- 
taries, in  the  main,  not  of  the  people's  savings, 
but  of  the  business  man's  quick  capital.  Yet, 
since  the  investment  banker  acquired  control 
of  banks  and  trust  companies,  these  institutions 
also  have  become,  like  the  life  companies,  large 
purchasers  of  bonds  and  stocks.  Many  of  our 
national  banks  have  invested  in  this  manner  a 
large  part  of  all  their  resources,  including  cap- 
ital, surplus  and  deposits.  The  bond  invest- 
ments of  some  banks  exceed  by  far  the  aggre- 
gate of  their  capital  and  surplus,  and  nearly 
equal  their  loanable  deposits. 

CONTROLLING     OTHER     PEOPLE's     QUICK     CAPITAL 

The  goose  that  lays  golden  eggs  has  been  con- 
sidered a  most  valuable  possession.  But  even 
more  profitable  is  the  privilege  of  taking  the 


18  OTHER  PEOPLE'S  MONEY 

golden  eggs  laid  by  somebody  else's  goose. 
The  investment  bankers  and  their  associates  now 
enjoy  that  privilege.  They  control  the  people 
through  the  people's  own  money.  If  the  bank- 
ers' power  were  commensurate  only  with  their 
wealth,  they  would  have  relatively  little  influence 
on  American  business.  Vast  fortunes  like  those 
of  the  Astors  are  no  doubt  regrettable.  They 
are  inconsistent  with  democracy.  They  are  un- 
social. And  they  seem  peculiarly  unjust  when 
they  represent  largely  unearned  increment.  But 
the  wealth  of  the  Astors  does  not  endanger 
political  or  industrial  liberty.  It  is  insignificant 
in  amount  as  compared  with  the  aggregate  wealth 
of  America,  or  even  of  New  York  City.  It  lacks 
significance  largely  because  its  owners  have  only 
the  income  from  their  own  wealth.  The  Astor 
wealth  is  static.  The  wealth  of  the  Morgan 
associates  is  dynamic.  The  power  and  the 
growth  of  power  of  our  financial  oligarchs  comes 
from  wielding  the  savings  and  quick  capital  of 
others.  In  two  of  the  tliree  groat  life  insurance 
companies  the  influence  of  J.  P.  Morgan  &  Co. 
and  their  associates  is  exerted  without  any  in- 
dividual investment  by  them  whatsoever.  Even 
in  the  E(}uitable,  where  Mr.  Morgan  bought  an 
actual  majority  of  all  the  outstanding  stock,  his 


OUR  FINANCIAL  OLIGARCHY        19 

investment  amounts  to  little  more  than  one-half 
of  one  per  cent,  of  the  assets  of  the  company. 
The  fetters  which  bind  the  people  are  forged  from 
the  people's  own  gold. 

But  the  reservoir  of  other  people's  money, 
from  which  the  investment  bankers  now  draw 
their  greatest  power,  is  not  the  life  insurance 
companies,  but  the  banks  and  the  trust  companies. 
Bank  deposits  represent  the  really  quick  capital 
of  the  nation.  They  are  the  life  blood  of  busi- 
nesses. Their  effective  force  is  much  greater  than 
that  of  an  equal  amount  of  wealth  permanently 
invested.  The  34  banks  and  trust  companies, 
which  the  Pujo  Committee  declared  to  be  directly 
controlled  by  the  Morgan  associates,  held  $1,983,- 
000,000  in  deposits.  Control  of  these  institutions 
means  the  ability  to  lend  a  large  part  of  these 
funds,  directly  and  indirectly,  to  themselves;  and 
what  is  often  even  more  important,  the  power 
to  prevent  the  funds  being  lent  to  any  rival  in- 
terests. These  huge  deposits  can,  in  the  dis- 
cretion of  those  in  control,  be  used  to  meet  the 
temporary  needs  of  their  subject  corporations. 
When  bonds  and  stocks  are  issued  to  finance 
permanently  these  corporations,  the  bank  depos- 
its can,  in  large  part,  be  loaned  by  the  investment 


20  OTHER  PEOPLE'S  MONEY 

bankers  in  control  to  themselves  and  their  asso- 
ciates; so  that  securities  bought  may  be  carried 
by  them,  until  sold  to  investors.  Or  these  bank 
deposits  may  be  loaned  to  allied  bankers,  or 
jobbers  in  securities,  or  to  speculators,  to  enable 
them  to  carry  the  bonds  or  stocks.  Easy  money 
tends  to  make  securities  rise  in  the  mai-ket. 
Tight  money  nearly  always  makes  them  fall. 
The  control  by  the  leading  investment  bankers 
over  the  banks  and  trust  companies  is  so  great, 
that  they  can  often  determine,  for  a  time,  the  mar- 
ket for  money  by  lending  or  refusing  to  lend  on 
the  Stock  Exchange.  In  this  way,  among  others, 
they  have  power  to  affect  the  general  trend  of 
prices  in  bonds  and  stocks.  Their  power  over  a 
particular  security  is  even  greater.  Its  sale  on 
the  market  may  depend  upon  whether  the  secur- 
ity is  favored  or  discriminated  against  when 
offered  to  the  banks  and  trust  companies,  as 
collateral  for  loans. 

Furthermore,  it  is  the  investment  banker's 
access  to  other  people's  money  in  controlled 
banks  and  trust  companies  which  alone  enables 
any  individual  banking  concern  to  take  so  large 
part  of  the  annual  output  of  bonds  and  stocks. 
The  banker's  own  capital,  however  large,  would 
soon    be    exhausted.     And    even    the    loanable 


OUR  FINANCIAL  OLIGARCHY        21 

funds  of  the  banks  would  often  be  exhausted, 
but  for  the  large  deposits  made  in  those  banks 
by  the  life  insurance,  railroad,  public  service,  and 
industrial  corporations  which  the  bankers  also 
control.  On  December  31,  1912,  the  three  lead- 
ing life  insurance  companies  had  deposits  in 
banks  and  trust  companies  aggregating  $13,839,- 
189.08.     As  the  Pujo  Committee  finds: 

''The  men  who  through  their  control  over  the 
funds  of  oiu"  railroads  and  industrial  companies 
are  able  to  direct  where  such  funds  shall  be  kept 
and  thus  to  create  these  great  reservoirs  of  the 
people's  money,  are  the  ones  who  are  in  position 
to  tap  those  reservoirs  for  the  ventures  in  which 
they  are  interested  and  to  prevent  their  being 
tapped  for  purposes  of  which  they  do  not  approve. 
The  latter  is  quite  as  important  a  factor  as  the 
former.  It  is  the  controlling  consideration  in  its 
effect  on  competition  in  the  railroad  and  industrial 
world." 

HAVING    YOUR    CAKE    AND    EATING   IT   TOO 

But  the  power  of  the  investment  banker  over 
other  people's  money  is  often  more  direct  and 
effective  than  that  exerted  through  controlled 
banks  and  trust  companies.  J.  P.  Morgan  &  Co. 
achieve  the  supposedly  impossible  feat  of  having 


22  OTHER  PEOPLE'S  MONEY 

their  cake  and  eating  it  too.  They  buy  the  bonds 
and  stocks  of  controlled  railroads  and  industrial 
concerns,  and  pay  the  pui'chase  price;  and  still 
do  not  part  with  their  money.  This  is  accom- 
plished by  the  simple  device  of  becoming  the  bank 
of  deposit  of  the  controlled  corporations,  instead 
of  having  the  company  deposit  in  some  merely 
controlled  bank  in  whose  operation  others  have 
at  least  some  share.  When  J.  P.  Morgan  &  Co. 
buy  an  issue  of  securities  the  purchase  money, 
instead  of  being  paid  over  to  the  corporation,  is 
retained  by  the  banker  for  the  corporation,  to 
be  drawn  upon  only  as  the  funds  are  needed  by 
the  corporation.  And  as  the  securities  are  issued 
in  large  blocks,  and  the  money  raised  is  often  not 
all  spent  until  long  thereafter,  the  aggregate  of 
the  balances  remaining  in  the  banker's  hands  are 
huge.  Thus  J.  P.  Morgan  &  Co.  (including  their 
Philadelphia  house,  called  Drexel  &  Co.)  held 
on  November  1,  1912,  deposits  aggregating 
$1G2,491,819.G5. 

POWER   AND    PELF 

The  operations  of  so  comprehensive  a  system 
of  concentration  necessarily  developed  in  the 
bankers  overweening  j)()wor.  And  the  bankers' 
power  grows  by  what  it  feeds  on.     Power  begets 


OUR  FINANCIAL  OLIGARCHY        23 

wealth;  and  added  wealth  opens  ever  new  oppor- 
tunities for  the  acquisition  of  wealth  and  power. 
The  operations  of  these  bankers  are  so  vast  and 
numerous  that  even  a  very  reasonable  compensa- 
tion for  the  service  performed  by  the  bankers, 
would,  in  the  aggregate,  produce  for  them  in- 
comes so  large  as  to  result  in  huge  accumulations 
of  capital.  But  the  compensation  taken  by  the 
bankers  as  commissions  or  profits  is  often  far 
from  reasonable.  Occupying,  as  they  so  fre- 
quently do,  !he  inconsistent  position  of  being  at 
the  same  tims  seller  and  buyer,  the  standard  for 
so-called  compensation  actually  applied,  is  not 
the  "Rule  of  reason",  but  ''All  the  traffic  will 
bear."  And  this  is  true  even  where  there  is  no 
sinister  motive.  The  weakness  of  human  nature 
prevents  men  from  being  good  judges  of  their 
own  deservings. 

The  syndicate  formed  by  J.  P.  Morgan  &  Co. 
to  underwrite  the  United  States  Steel  Corpora- 
tion took  for  its  services  securities  which  netted 
$62,500,000  in  cash.  Of  this  huge  sum  J.  P. 
Morgan  &  Co.  received,  as  syndicate  managers, 
$12,500,000  in  addition  to  the  share  which  they 
were  entitled  to  receive  as  syndicate  members. 
This  sum  of  $62,500,000  was  only  a  part  of  the  fees 
paid  for  the  service  of  monopolizing  the  steel  in- 


24  OTHER  PEOPLE'S  MONEY 

dustry.  In  addition  to  the  commissions  taken 
specifically  for  organizing  the  United  States 
Steel  Corporation,  large  sums  were  paid  for 
organizing  the  several  companies  of  which  it  is 
composed.  For  instance,  the  National  Tube 
Company  was  capitalized  at  $80,000,000  of 
stock;  $40,000,000  of  which  was  common  stock. 
Half  of  this  $40,000,000  was  taken  by  J.  P. 
Morgan  &  Co.  and  their  associates  for  promotion 
services;  and  the  $20,000,000  stock  so  taken 
became  later  exchangeable  for  $25,000,000  of 
Steel  Common.  Commissioner  of  Corporations 
Herbert  Knox  Smith,  found  that: 

"More  than  $150,000,000  of  the  stock  of  the 
Steel  Corporation  was  issued  directly  or  in- 
directly (tlirough  exchange)  for  mere  promo- 
tion or  underwriting  services.  In  other  words, 
nearly  one-seventh  of  the  total  capital  stock 
of  the  Steel  Corporation  appears  to  have  been 
issued  directly  or  indirectly  to  promoters' 
services." 

The  so-called  fees  and  commissions  taken  by 
the  bankers  and  associates  upon  the  organiza- 
tion of  the  trusts  have  been  exceptionally 
large.  But  even  after  the  trusts  are  successfully 
launched  the  exactions  of  the  bankers  are  often 


OUR  FINANCIAL  OLIGARCHY        25 

extortionate.  The  syndicate  which  underwrote, 
in  1901,  the  Steel  Corporation's  preferred  stock 
conversion  plan,  advanced  only  $20,000,000  in 
cash  and  received  an  underwriting  commission 
of  $6,800,000. 

The  exaction  of  huge  commissions  is  not  con- 
fined to  trust  and  other  industrial  concerns. 
The  Interborough  Railway  is  a  most  prosperous 
corporation.  It  earned  last  year  nearly  21  per 
cent,  on  its  capital  stock,  and  secured  from  New 
York  City,  in  connection  with  the  subway  ex- 
tension, a  very  favorable  contract.  But  when  it 
financed  its  $170,000,000  bond  issue  it  was  agreed 
that  J.  P.  Morgan  &  Co.  should  receive  three 
per  cent.,  that  is,  $5,100,000,  for  merely  forming 
this  syndicate.  More  recently,  the  New  York, 
New  Haven  &  Hartford  Railroad  agreed  to  pay 
J.  P.  Morgan  &  Co.  a  commission  of  $1,680,000; 
that  is,  2  1/2  per  cent.,  to  form  a  syndicate  to 
underwrite  an  issue  at  par  of  $67,000,000  20- 
year  6  per  cent,  convertible  debentures.  That 
means:  The  bankers  bound  themselves  to  take 
at  97  1/2  any  of  these  six  per  cent,  convertible 
bonds  which  stockholders  might  be  unwilling  to 
buy  at  100.  When  the  contract  was  made  the 
New  Haven's  then  outstanding  six  per  cent,  con- 
vertible bonds  were   selling   at   114.     And   the 


26  OTHER  PEOPLE'S  MONEY 

new  issue,  as  soon  as  announced,  was  in  such 
demand  that  the  public  offered  and  was  for 
months  wilUng  to  buy  at  106  bonds  which  the 
Company  were  to  pay  J.  P.  Morgan  &  Co.  $1,- 
680,000  to  be  willing  to  take  at  par. 

WHY    THE   BANKS   BECAME    INVESTMENT   BANKERS 

These  large  profits  from  promotions,  under- 
writings  and  security  purchases  led  to  a  revolu- 
tionary change  in  the  conduct  of  our  leading 
banking  institutions.  It  was  obvious  that  con- 
trol by  the  investment  bankers  of  the  deposits 
in  banks  and  trust  companies  was  an  essential 
element  in  their  securing  these  huge  profits. 
And  the  bank  officers  naturally  asked,  "Why 
then  should  not  the  banks  and  trust  companies 
share  in  so  profitable  a  field?  Why  should  not 
they  themselves  become  investment  bankers 
too,  with  all  the  new  functions  incident  to  'Big 
Business'?"  To  do  so  would  involve  a  de- 
parture from  the  legitimate  sphere  of  the 
banking  business,  which  is  the  making  of  tem- 
porary loans  to  business  concerns.  But  the 
temptation  was  irresistible.  The  invasion  of 
the  investment  banker  into  the  banks'  field  of 
operation  was  followed  by  a  counter  invasion 
by  the  banks  into  the  realm  of  the  investment 


OUR  FINANCIAL  OLIGARCHY        27 

banker.  Most  prominent  among  the  banks 
were  the  National  City  and  the  First  National 
of  New  York.  But  theirs  was  not  a  hostile 
invasion.  The  contending  forces  met  as  allies, 
joined  forces  to  control  the  business  of  the 
country,  and  to  "divide  the  spoils."  The  al- 
liance was  cemented  by  voting  trusts,  by  inter- 
locking directorates  and  by  joint  ownerships. 
There  resulted  the  fullest  "cooperation";  and 
ever  more  railroads,  public  service  corporations, 
and  industrial  concerns  were  brought  into 
complete  subjection. 


CHAPTER  II 
HOW  THE  COMBINERS  COMBINE 

Among  the  allies,  two  New  York  banks — 
the  National  City  and  the  First  National — 
stand  preeminent.  They  constitute,  with  the 
]\Iorgan  firm,  the  inner  group  of  the  Money 
Trust.  Each  of  the  two  banks,  like  J.  P.  Mor- 
gan &  Co.,  has  huge  resources.  Each  of  the 
two  banks,  like  the  firm  of  J.  P.  Morgan  &  Co., 
has  been  dominated  by  a  genius  in  combination. 
In  the  National  Citj^  it  is  James  Stillman;  in 
the  First  National,  George  F.  Baker.  Each  of 
these  gentlemen  was  formerly  President,  and  is 
now  Chairman  of  the  Board  of  Directors.  The 
resources  of  the  National  City  Bank  (including 
its  Siamese-twin  security  company)  are  about 
$300,000,000;  those  of  the  First  National  Bank 
(including  its  Siamese-twin  security  company) 
are  about  $200,000,000.  The  resources  of  the 
Morgan  firm  have  not  been  disclosed.  But  it 
appears  that  they  have  available  for  their  opera- 
tions, also,  huge  deposits  from  their  subjects; 
deposits  reported  as  $102,500,000. 

28 


HOW  THE  COMBINERS  COMBINE    29 

The  private  fortunes  of  the  chief  actors  in  the 
combination  have  not  been  ascertained.  But 
sporadic  evidence  indicates  how  great  are  the 
possibiUties  of  accumulation  when  one  has  the 
use  of  "other  people's  money."  Mr.  Morgan's 
wealth  became  proverbial.  Of  Mr.  Stillman's 
many  investments,  only  one  was  specifically 
referred  to,  as  he  was  in  Europe  during  the 
investigation,  and  did  not  testify.  But  that  one 
is  significant.  His  47,498  shares  in  the  National 
City  Bank  are  worth  about  $18,000,000.  Mr. 
Jacob  H.  Schiff  aptly  described  this  as  ''a  very 
nice  investment." 

Of  Mr.  Baker's  investments  we  know  more, 
as  he  testified  on  many  subjects.  His  20,000 
shares  in  the  First  National  Bank  are  worth  at 
least  $20,000,000.  His  stocks  in  six  other  New 
York  banks  and  trust  companies  are  together 
worth  about  $3,000,000.  The  scale  of  his  in- 
vestment in  railroads  may  be  inferred  from  his 
former  holdings  in  the  Central  Railroad  of  New 
Jersey.  JHe  was  its  largest  stockholder — so  large 
that  with  a  few  friends  he  held  a  majority  of 
the  $27,436,800  par  value  of  outstanding  stock, 
which  the  Reading  bought  at  $160  a  share. 
He  is  a  director  in  28  other  railroad  companies; 
and  presumably  a  stockholder  in,   at  least,   as 


30  OTHER  PEOPLE'S  MONEY 

many.  The  full  extent  of  his  fortune  was  not 
inquired  into,  for  that  was  not  an  issue  in  the 
investigation.  But  it  is  not  surprising  that  Mr. 
Baker  saw  little  need  of  new  laws.     When  asked: 

''You  think  everything  is  all  right  as  it  is 
in  this  world,  do  you  not?" 

He  answered: 

"Pretty  nearly." 

RAMIFICATIONS   OF   POWER 

But  wealth  expressed  in  figures  gives  a  wholly 
inadequate  picture  of  the  allies'  power.  Their 
wealth  is  dynamic.  It  is  wielded  by  geniuses 
in  combination.  It  finds  its  proper  expression 
in  means  of  control.  To  comprehend  the  power 
of  the  allies  we  must  try  to  visualize  the  ramifi- 
cations through  which  the  forces  operate. 

Mr.  Baker  is  a  director  in  22  corporations 
having,  with  their  many  subsidiaries,  aggregate 
resources  or  capitalization  of  $7,272,000,000. 
But  the  direct  and  visible  power  of  the  First 
National  Bank,  which  ]Mr.  Baker  dominates, 
extends  further.  The  Pujo  report  shows  that 
its  directors  (including  Mr.  Baker's  son)  arc 
directors  in  at  least  27  other  corporations 
with  resources  of  $4,270,000,000.  That  is,  the 
First  National  is  represented  in  19  corporations, 


HOW  THE  COMBINERS  COMBINE   31 

with    aggregate   resources    or    capitalization    of 
$11,542,000,000. 

It  may  help  to  an  appreciation  of  the  allies' 
power  to  name  a  few  of  the  more  prominent 
corporations  in  which,  for  instance,  Mr.  Baker's 
influence  is  exerted — visibly  and  directly — as 
voting  trustee,  executive  committee  man  or 
simple  director. 

1.  Banks,  Trust,  and  Life  Insurance  Companies: 
First  National  Bank  of  New  York;  National 
Bank  of  Commerce;  Farmers'  Loan  and  Trust 
Company;  Mutual  Life  Insurance  Company. 

2.  Railroad  [Companies:  New  York  Central 
Lines;  New  Haven,  Reading,  Erie,  Lackawanna, 
Lehigh  Valley,  Southern,  Northern  Pacific, 
Chicago,  Burlington  &  Quincy. 

3.  Public  Service  Corporations:  American  Tele- 
graph &  Telephone  Company,  Adams  Express 
Company. 

4.  Industrial  Corporations:  United  States  Steel 
Corporation,  Pullman  Company. 

Mr.  Stillman  is  a  director  in  only  7  corpora- 
tions, with  aggregate  assets  of  $2,476,000,000; 
but  the  directors  in  the  National  City  Bank, 
which  he  dominates,  are  directors  in  at  least  41 
other  corporations  which,  with  their  subsidiaries, 


32  OTHER  PEOPLE'S  MONEY 

have  an  aggregate  capitalization  or  resources  of 
S10,564,000,000.  The  members  of  the  firm  of 
J.  P.  ]M organ  &  Co.,  the  acknowledged  leader 
of  the  allied  forces,  hold  72  directorships  in  47 
of  the  largest  corporations  of  the  country. 

The  Pujo  Committee  finds  that  the  members 
of  J.  P.  Morgan  &  Co.  and  the  directors  of  their 
controlled  trust  companies  and  of  the  First 
National  and  the  National  City  Bank  together 
hold: 

"One  hundred  and  eighteen  directorships  in 
34  banks  and  trust  companies  having  total  re- 
sources of  $2,679,000,000  and  total  deposits  of 
$1,983,000,000. 

"Thirty  duectorships  in  10  insurance  com- 
panies having  total  assets  of  $2,293,000,000. 

"One  hundred  and  five  directorships  in  32 
transportation  systems  having  a  total  capitaliza- 
tion of  $11,784,000,000  and  a  total  mileage  (ex- 
cluding express  companies  and  steamship  lines) 
of  150,200. 

"Sixty- three  directorships  in  24  producing 
and  trading  corporations  having  a  total  capital- 
ization of  $3,330,000,000. 

"Twenty-five  directorships  in  12  public-utility 
corporations  having  a  total  capitalization  of 
$2,150,000,000. 


HOW  THE  COMBINERS  COMBINE   33 

''In  all,  341  directorships  in  112  corporations 
having  aggregate  resources  or  capitalization  of 
$22,245,000,000." 

TWENTY-TWO   BILLION   DOLLARS, 

''Twenty- two  billion  dollars  is  a  large  sum — 
so  large  that  we  have  difficulty  in  grasping  its 
significance.  The  mind  realizes  size  only  through 
comparisons.  With  what  can  we  compare 
twenty-two  billions  of  dollars?  Twenty-two  bil- 
lions of  dollars  is  more  than  three  times  the  as- 
sessed value  of  all  the  property,  real  and  personal, 
in  all  New  England.  It  is  nearly  three  times  the 
assessed  value  of  all  the  real  estate  in  the  City 
of  New  York.  It  is  more  than  twice  the  as- 
sessed value  of  all  the  property  in  the  thirteen 
Southern  states.  It  is  more  than  the  assessed 
value  of  all  the  property  in  the  twenty- two 
states,  north  and  south,  lying  west  of  the  Miss- 
issippi River. 

But  the  huge  sum  of  twenty-two  bilHon  dollars 
is  not  large  enough  to  include  all  the  corporations 
to  which  the  "influence"  of  the  three  allies, 
directly  and  visibly,  extends,  for 

First:  There  are  56  other  corporations  (not 
included  in  the  Pujo  schedule)  each  with  capital 
or  resources  of  over  $5,000,000,  and  aggregating 


34  OTHER  PEOPLE'S  MONEY 

nearly  $1,350,000,000,  in  which  the  ]\Iorgan  allies 
are  represented  according  to  the  directories  of 
directors. 

Second:  The  Pujo  schedule  does  not  include 
any  corporation  with  resources  of  less  than 
$5,000,000.  But  these  financial  giants  have 
shown  their  humility  by  becoming  directors  in 
many  such.  For  instance,  members  of  J.  P. 
Morgan  &  Co.,  and  directors  in  the  National 
City  Bank  and  the  First  National  Bank  are  also 
directors  in  158  such  corporations.  Available 
publications  disclose  the  capitalization  of  only 
38  of  these,  but  those  38  aggregate  $78,669,375. 

Third:  The  Pujo  schedule  includes  only  the 
corporations  in  which  the  Morgan  associates 
actually  appear  by  name  as  directors.  It  does 
not  include  those  in  which  they  are  represented 
by  dummies,  or  otherwise.  For  instance,  the 
Morgan  influence  certainly  extends  to  the  Kansas 
City  Terminal  Railway  Company,  for  which  they 
have  marketed  since  1910  (in  connection  with 
others)  four  issues  aggregating  $41,761,000. 
But  no  member  of  J.  P.  Morgan  &  Co.,  of  the 
National  City  Bank,  or  of  the  First  National 
Bank  appears  on  the  Kansas  City  Terminal 
directorate. 

Fourth:  The  Pujo  schedule  does  not  include 


HOW  THE  COMBINERS  COMBINE   35 

all  the  subsidiaries  of  the  corporations  scheduled. 
For  instance,  the  capitalization  of  the  New- 
Haven  System  is  given  as  $385,000,000.  That 
sum  represents  the  bond  and  stock  capital  of 
the  New  Haven  Railroad.  But  the  New  Haven 
System  comprises  many  controlled  corporations 
whose  capitalization  is  only  to  a  slight  extent  in- 
cluded directly  or  indirectly  in  the  New  Haven 
Railroad  balance  sheet.  The  New  Haven,  like 
most  large  corporations,  is  a  holding  company 
also;  and  a  holding  company  may  control  sub- 
sidiaries while  owning  but  a  small  part  of  the 
latters'  outstanding  securities.  Only  the  small 
part  so  held  will  be  represented  in  the  holding 
company's  balance  sheet.  Thus,  while  the  New 
Haven  Railroad's  capitalization  is  only  $385- 
000,000 — and  that  sum  only  appears  in  the  Pujo 
schedule — the  capitalization  of  the  New  Haven 
System,  as  shown  by  a  chart  submitted  to  the 
Committee,  is  over  twice  as  great;  namely, 
$849,000,000. 

It  is  clear,  therefore,  that  the  $22,000,000,000, 
referred  to  by  the  Pujo  Committee,  understates 
the  extent  of  concentration  effected  by  the  inner 
group  of  the  Money  Trust. 


S6  OTHER  PEOPLE'S  MONEY 

CEMENTING    THE    TRIPLE    ALLIANCE 

Care  was  taken  by  these  builders  of  imperial 
power  that  their  structure  should  be  enduring. 
It  has  been  buttressed  on  every  side  by  joint 
ownerships  and  mutual  stockholdings,  as  well  as 
by  close  personal  relationships;  for  directorships 
are  ephemeral  and  may  end  with  a  new  election. 
Mr.  Morgan  and  his  partners  acquired  one- 
sixth  of  the  stock  of  the  First  National  Bank, 
and  made  a  S6, 000,000  investment  in  the  stock 
of  the  National  City  Bank.  Then  J.  P.  IMorgan 
&  Co.,  the  National  City,  and  the  First  National 
(or  their  dominant  officers — Mr.  Stillman  and 
;Mr.  Baker)  acquired  together,  by  stock  purchases 
and  voting  trusts,  control  of  the  National  Bank 
of  Commerce,  with  its  $190,000,000  of  resources; 
of  the  Chase  National,  with  $125,000,000;  of  the 
Guaranty  Trust  Company,  with  $232,000,000; 
of  the  Bankers'  Trust  Company,  with  $205,000,- 
000;  and  of  a  number  of  smaller,  but  important, 
financial  institutions.  They  became  joint  voting 
trustees  in  great  railroad  systems;  and  finally 
(as  if  the  allies  were  united  into  a  single  concern) 
loyal  and  efficient  service  in  the  banks — like  that 
rendered  by  Mr.  Davison  and  Mr.  Lamont  in 
the  First  National — was  rewarded  by  promotion 


HOW  THE  COMBINERS  COMBINE    37 

to   membership  in   the   firm   of   J.   P.  Morgan 
&Co. 

THE    PROVINCIAL   ALLIES 

Thus  equipped  and  bound  together,  J.  P. 
Morgan  &  Co.,  the  National  City  and  the  First 
National  easily  dominated  America's  financial 
center,  New  York;  for  certain  other  important 
bankers,  to  be  hereafter  mentioned,  were  held 
in  restraint  by  "gentlemen's"  agreements. 
The  three  allies  dominated  Philadelphia  too; 
for  the  firm  of  Drexel  &  Co.  is  J.  P.  Morgan  & 
Co.  under  another  name.  But  there  are  two 
other  important  money  centers  in  America, 
Boston  and  Chicago. 

In  Boston  there  are  two  large  international 
banking  houses — Lee,  Higginson  &  Co.,  and 
Kidder,  Peabody  &  Co. — both  long  established 
and  rich;  and  each  possessing  an  extensive, 
wealthy  clientele  of  eager  investors  in  bonds  and 
stocks.  Since  1907  each  of  these  firms  has  pur- 
chased or  underwritten  (principally  in  conjunc- 
tion with  other  bankers)  about  100  different 
security  issues  of  the  greater  interstate  corpora- 
tions, the  issues  of  each  banker  amounting  in 
the  aggregate  to  over  $1,000,000,000.  Concen- 
tration  of  banking  capital  has  proceeded  even 


38  OTHER  PEOPLE'S  MONEY 

further  in  Boston  than  in  New  York.  By  suc- 
cessive consolidations  the  number  of  national 
banks  has  been  reduced  from  58  in  1898  to  19 
in  1913.  There  are  in  Boston  now  also  23  trust 
companies. 

The  National  Shawmut  Bank,  the  First 
National  Bank  of  Boston  and  the  Old  Colony 
Trust  Co.,  which  these  two  Boston  banking 
houses  and  their  associates  control,  alone  have 
aggregate  resources  of  $288,386,294,  constituting 
about  one-half  of  the  banking  resources  of  the 
city.  These  great  banking  institutions,  which 
are  themselves  the  result  of  many  consolidations, 
and  the  21  other  banks  and  trust  companies,  in 
which  their  directors  are  also  directors,  hold 
together  90  per  cent,  of  the  total  banking  re- 
sources of  Boston.  And  linked  to  them  by  inter- 
locking directorates  are  9  other  banks  and  trust 
companies  whose  aggregate  resources  are  about 
2  1/2  per  cent,  of  Boston's  total.  Thus  of  42 
banking  institutions,  33,  with  aggregate  resources 
of  8560,516,239,  holding  about  92  1/2  per  cent, 
of  the  aggregate  banking  resources  of  Boston, 
are  interlocked.  But  even  the  remaining  9  banks 
and  trust  companies,  which  together  hold  but 
7  1/2  per  cent,  of  Boston  banking  resources,  are 
not    all    independent    of    one    another.      Three 


HOW  THE  COMBINERS  COMBINE   39 

are  linked  together;  so  that  there  appear  to  be 
only  six  banks  in  all  Boston  that  are  free  from 
interlocking  directorate  relations.  They  to- 
gether represent  but  5  per  cent,  of  Boston's 
banking  resources.  And  it  may  well  be  doubted 
whether  all  of  even  those  6  are  entirely  free  from 
affiliation  with  the  other  groups. 

Boston's  banking  concentration  is  not  limited 
to  the  legal  confines  of  the  city.  Around  Boston 
proper  are  over  thirty  suburbs,  which  with  it 
form  what  is  popularly  known  as  "Greater 
Boston."  These  suburban  municipalities,  and 
also  other  important  cities  like  Worcester  and 
Springfield,  are,  in  many  respects,  within  Boston's 
"sphere  of  influence."  Boston's  inner  banking 
group  has  interlocked,  not  only  33  of  the  42 
banks  of  Boston  proper,  as  above  shown,  but  has 
linked  with  them,  by  interlocking  directorships, 
at  least  42  other  banks  and  trust  companies  in 
35  other  municipalities. 

Once  Lee,  Higginson  &  Co.  and  Kidder,  Pea- 
body  &  Co.  were  active  competitors.  They  are 
so  still  in  some  small,  or  purely  local  matters; 
but  both  are  devoted  co-operators  with  the 
Morgan  associates  in  larger  and  interstate  trans- 
actions; and  the  alliance  with  these  great  Boston 
banking  houses  has  been  cemented  by  mutual 


40  OTHER  PEOPLE'S  MONEY 

stockholdings  and  co-directorships.  Financial 
concentration  seems  to  have  found  its  highest  ex- 
pression in  Boston. 

Somewhat  similar  relations  exist  between  the 
triple  alliance  and  Chicago's  great  financial  insti- 
tutions— its  First  National  Bank,  the  Illinois 
Trust  and  Savings  Bank,  and  the  Continental 
&  Commercial  National  Bank — which  together 
control  resources  of  S561, 000,000.  And  similar 
relations  would  doubtless  be  found  to  exist  with 
the  leading  bankers  of  the  other  important  finan- 
cial centers  of  America,  as  to  which  the  Pujo 
Committee  was  prevented  by  lack  of  time  from 
making  investigation. 

THE    AUXILIARIES 

Such  are  the  primary,  such  the  secondary 
powers  which  comprise  the  IMoney  Trust;  but 
these  are  supplemented  by  forces  of  magnitude. 

"Radiating  from  these  principal  groups,"  says 
the  Pujo  Committee,  "and  closely  affiliated  with 
them  are  smaller  but  important  banking  houses, 
such  as  Kissel,  Kinnicut  &  Co.,  White,  Weld 
&  Co.,  and  Harvey  Fisk  &  Sons,  who  receive 
large  and  lucrative  patronage  from  the  dominat- 
ing groups,  and  are  used  by  the  latter  as  jobbers 
or  distributors  of  securities,  the  issuing  of  which 


HOW  THE  COMBINERS  COMBINE   41 

they  control,  but  which  for  reasons  of  their  own 
they  prefer  not  to  have  issued  or  distributed 
under  their  own  names.  Lee,  Higginson  &  Co., 
besides  being  partners  with  the  inner  group,  are 
also  frequently  utilized  in  this  service  because  of 
their  facilities  as  distributors  of  securities." 

For  instance,  J.  P.  Morgan  &  Co.  as  fiscal 
agents  of  the  New  Haven  Railroad  had  the 
right  to  market  its  securities  and  that  of  its  sub- 
sidiaries. Among  the  numerous  New  Haven 
subsidiaries,  is  the  New  York,  Westchester  and 
Boston — the  road  which  cost  $1,500,000  a  mile 
to  build,  and  which  earned  a  deficit  last  year 
of  nearly  $1,500,000,  besides  failing  to  earn  any 
return  upon  the  New  Haven's  own  stock  and 
bond  investment  of  $8,241,951.  When  the  New 
Haven  concluded  to  market  $17,200,000  of  these 
bonds,  J.  P.  Morgan  &  Co.,  ''for  reasons  of  their 
own,"  ''preferred  not  to  have  these  bonds  issued 
or  distributed  under  their  own  name."  The 
Morgan  firm  took  the  bonds  at  92  1/2  net;  and 
the  bonds  were  marketed  by  Kissel,  Kinnicut 
&  Co.  and  others  at  96  1/4. 

THE    SATELLITES 

The  alliance  is  still  further  supplemented,  as 
the  Pujo  Committee  shows: 


42  OTHER  PEOPLE'S  MONEY 

''Beyond  these  inner  groups  and  sub-groups  are 
banks  and  bankers  throughout  the  country  who 
co-operate  with  them  in  underwriting  or  guaran- 
teeing the  sale  of  securities  offered  to  the  public, 
and  who  also  act  as  distributors  of  such  securities. 
It  was  impossible  to  learn  the  identity  of  these 
corporations,  owing  to  the  unwillingness  of  the 
members  of  the  inner  group  to  disclose  the  names 
of  their  underwriters,  but  sufficient  appears  to 
justify  the  statement  that  there  are  at  least 
hundreds  of  them  and  that  they  extend  into 
many  of  the  cities  throughout  this  and  foreign 
countries. 

''The  patronage  thus  proceeding  from  the 
inner  group  and  its  sub-groups  is  of  great  value 
to  these  banks  and  bankers,  who  are  thus  tied 
by  self-interest  to  the  great  issuing  houses  and 
may  be  regarded  as  a  part  of  this  vast  financial 
organization.  Such  patronage  yields  no  incon- 
siderable part  of  the  income  of  these  banks  and 
bankers  and  without  much  risk  on  account  of  the 
facilities  of  the  principal  groups  for  placing  issues 
of  securities  through  their  domination  of  great 
banks  and  trust  companies  and  their  other  do- 
mestic afliliations  and  their  foreign  connections. 
The  underwriting  commissions  on  issues  made  by 
this  inner  group  are  usually  easily  earned  and  do 


HOW  THE  COMBINERS  COMBINE    43 

not  ordinarily  involve  the  underwriters  in  the 
purchase  of  the  underwritten  securities.  Their 
interest  in  the  transaction  is  generally  adjusted 
unless  they  choose  to  purchase  part  of  the  securi- 
ties, by  the  payment  to  them  of  a  commission. 
There  are,  however,  occasions  on  which  this  is 
not  the  case.  The  underwriters  are  then  re- 
quired to  take  the  securities.  Bankers  and 
brokers  are  so  anxious  to  be  permitted  to  par- 
ticipate in  these  transactions  under  the  lead  of 
the  inner  group  that  as  a  rule  they  join  when 
invited  to  do  so,  regardless  of  their  approval  of 
the  particular  business,  lest  by  refusing  they 
should  thereafter  cease  to  be  invited." 

In  other  words,  an  invitation  from  these 
royal  bankers  is  interpreted  as  a  command.  As 
a  result,  these  great  bankers  frequently  get  huge 
commissions  without  themselves  distributing  any 
of  the  bonds,  or  ever  having  taken  any  actual 
risk. 

"In  the  case  of  the  New  York  subway  financ- 
ing of  $170,000,000  of  bonds  by  Messrs.  Morgan 
&  Co.  and  their  associates,  Mr.  Davison  [as  the 
Pujo  Committee  reports]  estimated  that  there 
were  from  100  to  125  such  underwriters  who 
were    apparently    glad    to    agree   that    Messrs, 


U  OTHER  PEOPLE'S  MONEY 

Morgan  &  Co.,  the  First  National  Bank,  and  the 
National  City  Bank  should  receive  3  per  cent., 
— equal  to  $5,100,000 — for  forming  this  syndi- 
cate, thus  relieving  themselves  from  all  liability, 
whilst  the  underwriters  assumed  the  risk  of  what 
the  bonds  would  realize  and  of  being  required  to 
take  their  share  of  the  unsold  portion." 

THE    PROTECTION    OF   PSEUDO-ETHICS 

The  organization  of  the  ]\Ioney  Trust  is  in- 
tensive, the  combination  comprehensive;  but 
one  other  element  was  recognized  as  necessary 
to  render  it  stable,  and  to  make  its  dynamic  force 
irresistible.  Despotism,  be  it  financial  or  politi- 
cal, is  vulnerable,  unless  it  is  believed  to  rest 
upon  a  moral  sanction.  The  longing  for  freedom 
is  ineradicable.  It  will  express  itself  in  protest 
against  servitude  and  inaction,  unless  the  striv- 
ing for  freedom  be  made  to  seem  immoral. 
Long  ago  monarchs  invented,  as  a  preservative 
of  absolutism,  the  fiction  of  "The  divine  right  of 
kings."  Bankers,  imitating  royalty,  invented  re- 
cently that  precious  rule  of  so-called  "Ethics,"  by 
which  it  is  declared  unprofessional  to  come  to  the 
financial  relief  of  any  corporation  which  is  already 
the  prey  of  another  "reputable"  banker. 

"The  possibility  of  competition  between  these 


HOW  THE  COMBINERS  COMBINE   45 

banking  houses  in  the  purchase  of  securities," 
says  the  Pujo  Committee,  "is  further  removed 
by  the  understanding  between  them  and  others, 
that  one  will  not  seek,  by  offering  better  terms, 
to  take  away  from  another,  a  customer  which  it 
has  theretofore  served,  and  by  corollary  of  this, 
namely,  that  where  given  bankers  have  once 
satisfactorily  united  in  bringing  out  an  issue  of 
a  corporation,  they  shall  also  join  in  bringing 
out  any  subsequent  issue  of  the  same  corpora- 
tions. This  is  described  as  a  principle  of  banking 
ethics." 

The  "Ethical"  basis  of  the  rule  must  be  that 
the  interests  of  the  combined  bankers  are 
superior  to  the  interests  of  the  rest  of  the  com- 
munity. Their  attitude  reminds  one  of  the 
"spheres  of  influence"  with  ample  " hinterlands " 
by  which  rapacious  nations  are  adjusting  differ- 
ences. Important  banking  concerns,  too  am- 
bitious to  be  willing  to  take  a  subordinate  position 
in  the  alliance,  and  too  powerful  to  be  suppressed, 
are  accorded  a  financial  "sphere  of  influence" 
upon  the  understanding  that  the  rule  of  banking 
ethics  will  be  faithfully  observed.  Most  promi- 
nent among  such  lesser  potentates  are  Kuhn, 
Loeb  &  Co.,  of  New  York,  an  international 
banking  house  of  great  wealth,  with  large  clientele 


46  OTHER  PEOPLE'S  MONEY 

and  connections.  They  are  accorded  an  impor- 
tant "sphere  of  influence"  in  American  rail- 
roading, including  among  other  systems  the 
Baltimore  &  Ohio,  the  Union  Pacific  and  the 
Southern  Pacific.  They  and  the  IMorgan  group 
have  with  few  exceptions  preempted  the  banking 
business  of  the  important  railroads  of  the 
country.  But  even  Kuhn,  Loeb  &  Co.  are  not 
wholly  independent.  The  Pujo  Committee  re- 
ports that  they  are  ''quaUfied  aUies  of  the  inner 
group";  and  through  their  "close  relations  with 
the  National  City  Bank  and  the  National  Bank 
of  Commerce  and  other  financial  institutions" 
have  "many  interests  in  common  with  the 
Morgan  associates,  conducting  large  joint- 
account  operations  with  them." 

THE    EVILS   RESULTANT 

First:  These  banker-barons  levy,  through 
their  excessive  exactions,  a  heavy  toll  upon  the 
whole  community;  upon  owners  of  money  for 
leave  to  invest  it;  upon  railroads,  public  service 
and  industrial  companies,  for  leave  to  use  this 
money  of  other  people;  and,  through  these 
corporations,  upon  consumers. 

"The  charge  of  capital,"  says  the  Pujo  Com- 
mittee, "which  of  course  enters  universally  into 


HOW  THE  COMBINERS  COMBINE   47 

the  price  of  commodities  and  of  service,  is  thus 
in  effect  determined  by  agreement  amongst  those 
supplying  it  and  not  under  the  check  of  competi- 
tion. If  there  be  any  virtue  in  the  principle  of 
competition,  certainly  any  plan  or  arrangement 
which  prevents  its  operation  in  the  performance 
of  so  fundamental  a  commercial  function  as  the 
supplying  of  capital  is  peculiarly  injurious." 

Second:  More  serious,  however,  is  the  effect 
of  the  Money  Trust  in  directly  suppressing  com- 
petition. That  suppression  enables  the  monopo- 
list to  extort  excessive  profits;  but  monopoly 
increases  the  burden  of  the  consumer  even  more 
in  other  ways.  Monopoly  arrests  development; 
and  through  arresting  development,  prevents 
that  lessening  of  the  cost  of  production  and  of 
distribution  which  would  otherwise  take  place. 

Can  full  competition  exist  among  the  anthra- 
cite coal  railroads  when  the  Morgan  associates 
are  potent  in  all  of  them?  And  with  like 
conditions  prevailing,  what  competition  is  to  be 
expected  between  the  Northern  Pacific  and  the 
Great  Northern,  the  Southern,  the  Louisville 
and  Nashville,  and  the  Atlantic  Coast  Line;  or 
between  the  Westinghouse  Manufacturing  Com- 
pany and  the  General  Electric  Company?  As 
the  Pujo  Committee  finds: 


48  OTHER  PEOPLE'S  MONEY 

"Such  affiliations  tend  as  a  cover  and  conduit 
for  secret  arrangements  and  understandings  in 
restriction  of  competition  through  the  agency  of 
the  banking  house  thus  situated." 

And  under  existing  conditions  of  combina- 
tion, reUef  tlirough  other  banking  houses  is 
precluded. 

"It  can  hardly  be  expected  that  the  banks, 
trust  companies,  and  other  institutions  that  are 
thus  seeking  participation  from  this  inner  group 
would  be  likely  to  engage  in  business  of  a  charac- 
ter that  would  be  displeasing  to  the  latter  or 
would  interfere  with  their  plans  or  prestige. 
And  so  the  protection  that  can  be  afforded  by  the 
members  of  the  inner  group  constitutes  the 
safest  refuge  of  our  great  industrial  combinations 
against  future  competition.  The  powerful  grip 
of  these  gentlemen  is  upon  the  throttle  that 
controls  the  wheels  of  credit,  and  upon  their 
signal  those  wheels  will  tm-n  or  stop." 

TJiird:  But  far  more  serious  even  than  the 
suppression  of  competition  is  the  suppression  of 
industrial  liberty,  indeed  of  manhood  itself, 
which  this  overweening  financial  power  entails. 
The  intimidation  which  it  effects  extends  far 
beyond  "the  banks,  trust  companies,  and  other 
institutions  seeking  participation  from  this  inner 


HOW  THE  COMBINERS  COMBINE   49 

group  in  their  lucrative  underwritings" ;  and  far 
beyond  those  interested  in  the  great  corporations 
directly  dependent  upon  the  inner  group.  Its 
blighting  and  benumbing  effect  extends  as  well 
to  the  small  and  seemingly  independent  business 
man,  to  the  vast  army  of  professional  men  and 
others  directly  dependent  upon  *'Big  Business," 
and  to  many  another;  for 

1.  Nearly  every  enterprising  business  man 
needs  bank  credit.  The  granting  of  credit  in- 
volves the  exercise  of  judgment  of  the  bank  offi- 
cials; and  however  honestly  the  bank  officials  may 
wish  to  exercise  their  discretion,  experience  shows 
that  their  judgment  is  warped  by  the  existence 
of  the  all-pervading  power  of  the  Money  Trust. 
He  who  openly  opposes  the  great  interests  will 
often  be  found  to  lack  that  quality  of  "safe 
and  sane"-ness  which  is  the  basis  of  financial 
credit. 

2.  Nearly  every  enterprising  business  man  and 
a  large  part  of  our  professional  men  have  some- 
thing to  sell  to,  or  must  buy  something  from,  the 
great  corporations  to  which  the  control  or 
influence  of  the  money  lords  extends  directly,  or 
from  or  to  affiliated  interests.  Sometimes  it  is 
merchandise;  sometimes  it  is  service;  sometimes 


50  OTHER  PEOPLE'S  MONEY 

they  have  nothing  either  to  buy  or  to  sell,  but 
desire  political  or  social  advancement.  Some- 
times they  want  merely  peace.  Experience  shows 
that  "it  is  not  healthy  to  buck  against  a  locomo- 
We,"  and  ''Business  is  business." 

Here  and  there  you  will  find  a  hero, — red- 
blooded,  and  courageous, — loving  manhood  more 
than  wealth,  place  or  security, — who  dared  to 
fight  for  independence  and  won.  Here  and  there 
you  may  find  the  mart}T,  who  resisted  in  silence 
and  suffered  with  resignation.  But  America, 
which  seeks  "the  greatest  good  of  the  greatest 
number,"  cannot  be  content  with  conditions  that 
fit  only  the  hero,  the  martyr  or  the  slave. 


CHAPTER  III 

INTERLOCKING  DIRECTORATES 

The  practice  of  interlocking  directorates  is  the 
root  of  many  evils.  It  offends  laws  human  and 
divine.  Applied  to  rival  corporations,  it  tends  to 
the  suppression  of  competition  and  to  violation  of 
the  Sherman  law.  Applied  to  corporations  which 
deal  with  each  other,  it  tends  to  disloyalty  and  to 
violation  of  the  fundamental  law  that  no  man  can 
serve  two  masters.  In  either  event  it  tends  to 
inefficiency;  for  it  removes  incentive  and  destroys 
soundness  of  judgment.  It  is  undemocratic,  for 
it  rejects  the  platform:  ''A  fair  field  and  no 
favors," — substituting  the  pull  of  privilege  for  the 
push  of  manhood.  It  is  the  most  potent  instru- 
ment of  the  Money  Trust.  Break  the  control  so 
exercised  by  the  investment  bankers  over  rail- 
roads, public-service  and  industrial  corporations, 
over  banks,  life  insurance  and  trust  companies, 
and  a  long  step  will  have  been  taken  toward 
attainment  of  the  New  Freedom. 

The  term  ''Interlocking  directorates"  is  here 
used  in  a  broad  sense  as  including  all  intertwined 

51 


52  OTHER  PEOPLE'S  MONEY 

conflicting  interests,  whatever  the  form,  and  by 
whatever  device  effected.  The  objection  extends 
alike  to  contracts  of  a  corporation  whether  with 
one  of  its  directors  individually,  or  with  a  firm 
of  which  he  is  a  member,  or  with  another  corpora- 
tion in  which  he  is  interested  as  an  officer  or 
director  or  stockholder.  The  objection  extends 
likewise  to  men  holding  the  inconsistent  position 
of  director  in  two  potentially  competing  corpora- 
tions, even  if  those  corporations  do  not  actually 
deal  with  each  other. 

THE   ENDLESS   CHAIN 

A  single  example  will  illustrate  the  vicious  circle 
of  control — the  endless  chain — through  which  our 
financial  oligarchy  now  operates: 

J.  P.  Morgan  (or  a  partner),  a  director  of  the 
New  York,  New  Haven  &  Hartford  Railroad, 
causes  that  company  to  sell  to  J.  P.  IMorgan  & 
Co.  an  issue  of  bonds.  J.  P.  Morgan  &  Co. 
borrow  the  money  with  which  to  pay  for  the  bonds 
from  the  Guaranty  Trust  Company,  of  which 
Mr.  Morgan  (or  a  partner)  is  a  director.  J.  P. 
Morgan  &  Co.  sell  the  bonds  to  the  Penn  Mutual 
Life  Insurance  Company,  of  which  Mr.  Morgan 
(or  a  partner)  is  a  director.  The  New  Haven 
spends  the  proceeds  of  the  bonds  in  purchasing 


INTERLOCKING  DIRECTORATES    53 

steel  rails  from  the  United  States  Steel  Corpora- 
tion, of  which  Mr.  Morgan  (or  a  partner)  is  a 
director.  The  United  States  Steel  Corporation 
spends  the  proceeds  of  the  rails  in  purchasing 
electrical  supplies  from  the  General  Electric 
Company,  of  which  Mr.  Morgan  (or  a  partner) 
is  a  director.  The  General  Electric  sells  supplies 
to  the  Western  Union  Telegraph  Company,  a 
subsidiary  of  the  American  Telephone  and 
Telegraph  Company;  and  in  both  Mr.  Morgan 
(or  a  partner)  is  a  director.  The  Telegraph 
Company  has  an  exclusive  wire  contract  with  the 
Reading,  of  which  Mr.  Morgan  (or  a  partner)  is 
a  director.  The  Reading  buys  its  passenger  cars 
from  the  Pullman  Company,  of  which  Mr. 
Morgan  (or  a  partner)  is  a  director.  The 
Pullman  Company  buys  (for  local  use)  loco- 
motives from  the  Baldwin  Locomotive  Company, 
of  which  Mr.  Morgan  (or  a  partner)  is  a  director. 
The  Reading,  the  General  Electric,  the  Steel 
Corporation  and  the  New  Haven,  like  the 
Pullman,  buy  locomotives  from  the  Baldwin 
Company.  The  Steel  Corporation,  the  Tele- 
phone Company,  the  New  Haven,  the  Reading, 
the  Pullman  and  the  Baldwin  Companies,  like 
the  Western  Union,  buy  electrical  supplies  from 
the  General  Electric.     The  Baldwin,   the  Pull- 


54  OTHER  PEOPLE'S  MONEY 

man,  the  Reading,  the  Telephone,  the  Telegraph 
and  the  General  Electric  companies,  like  the 
New  Haven,  buy  steel  products  from  the  Steel 
Corporation.  Each  and  every  one  of  the  com- 
panies last  named  markets  its  securities  through 
J.  P.  Morgan  &  Co.;  each  deposits  its  funds  with 
J.  P.  Morgan  &  Co.;  and  with  these  funds  of 
each,  the  firm  enters  upon  further  operations. 

This  specific  illustration  is  in  part  suppositi- 
tious; but  it  represents  truthfully  the  operation  of 
interlocking  directorates.  Only  it  must  be  multi- 
phed  many  times  and  with  many  permutations 
to  represent  fully  the  extent  to  which  the  interests 
of  a  few  men  are  intertwined.  Instead  of  taking 
the  New  Haven  as  the  railroad  starting  point  in 
our  example,  the  New  York  Central,  the  Santa 
F6,  the  Southern,  the  Lehigh  Valley,  the  Chicago 
and  Great  Western,  the  Erie  or  the  P6re  Mar- 
quette might  have  been  selected;  instead  of  the 
Guaranty  Trust  Company  as  the  banking  reser- 
voir, any  one  of  a  dozen  other  important  banks  or 
trust  companies;  instead  of  the  Penn  Mutual  as 
piu-chaser  of  the  bonds,  other  insurance  compa- 
nies; instead  of  the  General  Electric,  its  qualified 
competitor,  the  Westinghouse  Electric  and  Manu- 
facturing Company.     The  chain  is  indeed  end- 


INTERLOCKING  DIRECTORATES    55 

less;  for  each  controlled  corporation  is  entwined 
with  many  others. 

As  the  nexus  of  "Big  Business"  the  Steel 
Corporation  stands,  of  course,  preeminent.  The 
Stanley  Committee  showed  that  the  few  men  who 
control  the  Steel  Corporation,  itself  an  owner  of 
important  railroads,  are  directors  also  in  twenty- 
nine  other  railroad  systems,  with  126,000  miles 
of  hne  (more  than  half  the  railroad  mileage  of  the 
United  States),  and  in  important  steamship 
companies.  Through  all  these  alliances  and  the 
huge  traffic  it  controls,  the  Steel  Corporation's 
influence  pervades  railroad  and  steamship  com- 
panies— not  as  carriers  only — but  as  the  largest 
customers  for  steel.  And  its  influence  with 
users  of  steel  extends  much  further.  These  same 
few  men  are  also  directors  in  twelve  steel-using 
street  railway  systems,  including  some  of  the 
largest  in  the  world.  They  are  directors  in  forty 
machinery  and  similar  steel-using  manufacturing 
companies;  in  many  gas,  oil  and  water  com- 
panies, extensive  users  of  iron  products;  and 
in  the  great  wire-using  telephone  and  telegraph 
companies.  The  aggregate  assets  of  these  differ- 
ent corporations — through  which  these  few  men 
exert  their  influence  over  the  business  of  the 
United  States — exceeds  sixteen  billion  dollars. 


56  OTHER  PEOPLE'S  MONEY 

Obviously,  interlocking  directorates,  and  all 
that  term  implies,  must  be  effectually  prohibited 
before  the  freedom  of  American  business  can  be 
regained.  The  prohibition  will  not  be  an  in- 
novation. It  will  merely  give  full  legal  sanction 
to  the  fundamental  law  of  morals  and  of  human 
nature:  that  "No  man  can  serve  two  masters." 
The  surprising  fact  is  that  a  principle  of  equity  so 
firmly  rooted  should  have  been  departed  from  at 
all  in  deahng  with  corporations.  For  no  rule 
of  law  has,  in  other  connections,  been  more  rigor- 
ously appUed,  than  that  which  prohibits  a  trustee 
from  occupying  inconsistent  positions,  from  deal- 
ing with  himself,  or  from  using  his  fiduciary 
position  for  personal  profit.  And  a  director  of  a 
corporation  is  as  obviously  a  trustee  as  persons 
holding  similar  positions  in  an  unincorporated 
association,  or  in  a  private  trust  estate,  who  are 
called  specifically  by  that  name.  The  Courts 
have  recognized  this  fully. 

Thus,  the  Court  of  Appeals  of  New  York  de- 
clared in  an  important  case: 

"While  not  technically  trustees,  for  the  title 
of  the  corporate  property  was  in  the  corporation 
itself,  they  were  charged  with  the  duties  and 
subject    to    the   liabilities  of   trustees.     Clothed 


INTERLOCKING  DIRECTORATES     57 

with  the  power  of  controlling  the  property  and 
managing  the  affairs  of  the  corporation  without 
let  or  hindrance,  as  to  third  persons,  they  were  its 
agents;  but  as  to  the  corporation  itself  equity 
holds  them  liable  as  trustees.  While  courts  of 
law  generally  treat  the  directors  as  agents,  courts 
of  equity  treat  them  as  trustees,  and  hold  them 
to  a  strict  account  for  any  breach  of  the  trust 
relation.  For  all  practical  purposes  they  are 
trustees,  when  called  upor  in  equity  to  account 
for  their  official  conduct." 

NULLIFYING   THE    LAW 

But  this  wholesome  rule  of  business,  so  clearly 
laid  down,  was  practically  nullified  by  courts 
in  creating  two  unfortunate  limitations,  as 
concessions  doubtless  to  the  supposed  needs  of 
commerce. 

First:  Courts  held  valid  contracts  between  a 
corporation  and  a  director,  or  between  two 
corporations  with  a  common  director,  where  it 
was  shown  that  in  making  the  contract,  the  cor- 
poration was  represented  by  independent  direct- 
ors and  that  the  vote  of  the  interested  director 
was  unnecessary  to  carry  the  motion  and  his  pres- 
ence was  not  needed  to  constitute  a  quorum. 

Second:    Courts  held  that  even  where  a  com- 


58  OTHER  PEOPLE'S  MONEY 

mon  director  participated  actively  in  the  making 
of  a  contract  between  two  corporations,  the 
contract  was  not  absolutely  void,  but  voidable 
only  at  the  election  of  the  corporation. 

The  first  limitation  ignored  the  rule  of  law  that 
a  beneficiary  is  entitled  to  disinterested  advice 
from  all  liis  trustees,  and  not  merely  from  some; 
and  that  a  trustee  may  violate  his  trust  by  in- 
action as  well  as  by  action.  It  ignored,  also,  the 
laws  of  human  nature,  in  assuming  that  the  in- 
fluence of  a  director  is  confined  to  the  act  of 
voting.  Every  one  knows  that  the  most  effective 
work  is  done  before  any  vote  is  taken,  subtly, 
and  without  provable  participation.  Every  one 
should  know  that  the  denial  of  minority  repre- 
sentation on  boards  of  directors  has  resulted  in 
the  domination  of  most  corporations  by  one  or 
two  men;  and  in  practically  banishing  all  criti- 
cism of  the  dominant  power.  And  even  where 
the  board  is  not  so  dominated,  there  is  too  often 
that  "harmonious  cooperation"  among  directors 
which  secures  for  each,  in  his  own  line,  a  due  share 
of  the  corporation's  favors. 

The  second  limitation — by  which  contracts, 
in  the  making  of  which  the  interested  director 
participates  actively,  are  held  merely  voidable 
instead  of  absolutely  void — ignores  the  teachings 


INTERLOCKING  DIRECTORATES    59 

of  experience.  To  hold  such  contracts  merely 
voidable  has  resulted  practically  in  declaring 
them  valid.  It  is  the  directors  who  control 
corporate  action;  and  there  is  little  reason  to 
expect  that  any  contract,  entered  into  by  a 
board  with  a  fellow  director,  however  unfair, 
would  be  subsequently  avoided.  Appeals  from 
Philip  drunk  to  Philip  sober  are  not  of  frequent 
occurrence,  nor  very  fruitful.  But  here  we  lack 
even  an  appealing  party.  Directors  and  the 
dominant  stockholders  would,  of  course,  not 
appeal;  and  the  minority  stockholders  have 
rarely  the  knowledge  of  facts  which  is  essential 
to  an  effective  appeal,  whether  it  be  made  to 
the  directors,  to  the  whole  body  of  stockholders, 
or  to  the  courts.  Besides,  the  financial  burden 
and  the  risks  incident  to  any  attempt  of  individual 
stockholders  to  interfere  with  an  existing  manage- 
ment is  ordinarily  prohibitive.  Proceedings  to 
avoid  contracts  with  directors  are,  therefore,  sel- 
dom brought,  except  after  a  radical  change  in  the 
membership  of  the  board.  And  radical  changes 
in  a  board's  membership  are  rare.  Indeed  the 
Pujo  Committee  reports: 

"None  of  the  witnesses  (the  leading  American 
bankers  testified)  was  able  to  name  an  instance  in 


60  OTHER  PEOPLE'S  MONEY 

the  history  of  the  country  in  which  the  stock- 
holders had  succeeded  in  overthi'owing  an  exist- 
ing management  in  any  large  corporation.  Nor 
does  it  appear  that  stockholders  have  ever  even 
succeeded  in  so  far  as  to  secure  the  investigation 
of  an  existing  management  of  a  corporation  to 
ascertain  whether  it  has  been  well  or  honestly 
managed." 

Air.  Max  Pam  proposed  in  the  April,  1913, 
Harvard  Law  Review,  that  the  government  come 
to  the  aid  of  minority  stockholders.  He  urged 
that  the  president  of  every  corporation  be  re- 
quired to  report  annuallj^  to  the  stockholders,  and 
to  state  and  federal  officials  every  contract  made 
by  the  company  in  which  any  director  is  inter- 
ested;  that  the  Attorney-General  of  the  United 
States  or  the  State  investigate  the  same  and  take 
proper  proceedings  to  set  all  such  contracts 
aside  and  recover  any  damages  sufTered;  or 
without  disaffirming  the  contracts  to  recover 
(rom  the  interested  directors  the  profits  derived 
iherefrom.  And  to  this  end  also,  that  State  and 
National  Bank  Examiners,  State  Superintend- 
ents of  Insurance,  and  the  Interstate  Commerce 
Commission  be  directed  to  examine  the  records 
of  every  bank,   trust  company,  insurance  com- 


INTERLOCKING  DIRECTORATES     Gl 

pany,  railroad  company  and  every  other  corporar 
tion  engaged  in  interstate  commerce.  Mr.  Pam's 
views  concerning  interlocking  directorates  are 
entitled  to  careful  study.  As  counsel  promi- 
nently identified  with  the  organization  of  trusts, 
he  had  for  years  full  opportunity  of  weighing  the 
advantages  and  disadvantages  of  ''Big Business." 
His  conviction  that  the  practice  of  interlocking 
directorates  is  a  menace  to  the  public  and  demands 
drastic  legislation,  is  significant.  And  much  can 
be  said  in  support  of  the  specific  measure  which 
he  proposes.  But  to  be  effective,  the  remedy 
must  be  fundamental  and  comprehensive. 

THE    ESSENTIALS    OF   PROTECTION 

Protection  to  minority  stockholders  demands 
that  corporations  be  prohibited  absolutely  from 
making  contracts  in  which  a  director  has  a 
private  interest,  and  that  all  such  contracts  be 
declared  not  voidable  merely,  but  absolutely 
void. 

In  the  case  of  railroads  and  public-service 
corporations  (in  contradistinction  to  private 
industrial  companies),  such  prohibition  is  de- 
manded, also,  in  the  interests  of  the  general 
public.  For  interlocking  interests  breed  in- 
efficiency and  disloyalty;  and  the  public  pays, 


62  OTHER  PEOPLE'S  MONEY 

in  higher  rates  or  in  poor  service,  a  large  part  of 
the  penalty  for  graft  and  inefficiency.  Indeed, 
whether  rates  are  adequate  or  excessive  cannot 
be  determined  until  it  is  known  whether  the 
gross  earnings  of  the  corporation  are  properly 
expended.  For  when  a  company's  important 
contracts  are  made  through  directors  who  are 
interested  on  both  sides,  the  common  presump- 
tion that  money  spent  has  been  properly  spent 
does  not  prevail.  And  this  is  particularly  true 
in  railroading,  where  the  company  so  often  lacks 
effective  competition  in  its  own  field. 

But  the  compelling  reason  for  prohibiting 
interlocking  directorates  is  neither  the  protection 
of  stockholders,  nor  the  protection  of  the  public 
from  the  incidents  of  inefficiency  and  graft. 
Conclusive  evidence  (if  obtainable)  that  the 
practice  of  interlocking  directorates  benefited  all 
stockholders  and  was  the  most  efficient  form  of 
organization,  would  not  remove  the  objections. 
For  even  more  important  than  efficiency  are  in- 
dustrial and  political  liberty;  and  these  are 
imperiled  by  the  Money  Trust.  Interlocking 
directorates  must  he  prohibited,  because  it  is  impos- 
sible to  break  the  Money  Trust  without  putting  an 
end  to  the  practice  in  the  larger  corporations. 


INTERLOCKING  DIRECTORATES     63 

BANKS   AS    PUBLIC-SERVICE    CORPORATIONS 

The  practice  of  interlocking  directorates  is 
peculiarly  objectionable  when  applied  to  banks, 
because  of  the  nature  and  functions  of  those 
institutions.  Bank  deposits  are  an  important 
part  of  our  currency  sy^em.  They  are  almost 
as  essential  a  factor  in  commerce  as  our  railways. 
Receiving  deposits  and  making  loans  therefrom 
should  be  treated  by  the  law  not  as  a  private 
business,  but  as  one  of  the  public  services.  And 
recognizing  it  to  be  such,  the  law  already  regu- 
lates it  in  many  ways.  The  function  of  a  bank 
is  to  receive  and  to  loan  money.  It  has  no  more 
right  than  a  common  carrier  to  use  its  powers 
specifically  to  build  up  or  to  destroy  other 
businesses.  The  granting  or  withholding  of  a 
loan  should  be  determined,  so  far  as  concerns  the 
borrower,  solely  by  the  interest  rate  and  the  risk 
involved;  and  not  by  favoritism  or  other  con- 
siderations foreign  to  the  banking  function. 
Men  may  safely  be  allowed  to  grant  or  to  deny 
loans  of  their  own  money  to  whomsoever  they 
see  fit,  whatsoever  their  motive  may  be.  But 
bank  resources  are,  in  the  main,  not  owned  by  the 
stockholders  nor  by  the  directors.  Nearly  three- 
fourths  of  the  aggregate  resources  of  the  thirty- 


64  OTHER  PEOPLE'S  MONEY 

four  banking  institutions  in  which  the  Morgan 
associates  hold  a  predominant  influence  are  rep- 
resented by  deposits.  The  dependence  of  com- 
merce and  industry  upon  bank  deposits,  as  the 
common  reservoir  of  quick  capital  is  so  complete, 
that  deposit  banking  should  be  recognized  as 
one  of  the  businesses  "affected  with  a  public 
interest."  And  the  general  rule  which  forbids 
public-service  corporations  from  making  unjust 
discriminations  or  giving  undue  preference  should 
be  applied  to  the  operations  of  such  banks. 

Senator  Owen,  Chairman  of  the  Committee 
on  Banking  and  Currency,  said  recently: 

"My  own  judgment  is  that  a  bank  is  a  public- 
utility  institution  and  cannot  be  treated  as  a 
private  affair,  for  the  simple  reason  that  the 
public  is  invited,  under  the  safeguards  of  the 
government,  to  deposit  its  money  with  the  bank, 
and  the  public  has  a  right  to  have  its  interests 
safeguarded  through  organized  authorities.  The 
logic  of  this  is  beyond  escape.  All  banks  in  the 
United  States,  public  and  private,  should  be 
treated  as  public-utility  institutions,  where  they 
receive  public  deposits." 

The  directors  and  officers  of  banking  institu- 
tions must,   of  course,  be  entrusted  with  wide 


INTERLOCKING  DIRECTORATES     65 

discretion  in  the  granting  or  denying  of  loans. 
But  that  discretion  should  be  exercised,  not  only 
honestly  as  it  affects  stockholders,  but  also 
impartially  as  it  affects  the  public.  Mere 
honesty  to  the  stockholders  demands  that  the 
interests  to  be  considered  by  the  directors  be 
the  interests  of  all  the  stockholders;  not  the  profit 
of  the  part  of  them  who  happen  to  be  its  direct- 
ors. But  the  general  welfare  demands  of  the 
director,  as  trustee  for  the  public,  performance  of 
a  stricter  duty.  The  fact  that  the  granting  of 
loans  involves  a  delicate  exercise  of  discretion 
makes  it  difficult  to  determine  whether  the  rule 
of  equahty  of  treatment,  which  every  public- 
service  corporation  owes,  has  been  performed. 
But  that  difficulty  merely  emphasizes  the  im- 
portance of  making  absolute  the  rule  that  banks 
of  deposit  shall  not  make  any  loan  nor  engage  in 
any  transaction  in  which  a  director  has  a  private 
interest.  And  we  should  bear  this  in  mind: 
If  privately- owned  banks  fail  in  the  public 
duty  to  afford  borrowers  equality  of  opportunity, 
there  will  arise  a  demand  for  government-owned 
banks,  which  will  become  irresistible. 

The  statement  of  Mr.  Justice  Holmes  of  the 
Supreme  Court  of  the  United  States,  in  the 
Oklahoma  Bank  case,  is  significant: 


66  OTHER  PEOPLE'S  MONEY 

''We  cannot  say  that  the  public  interests  to 
which  we  have  adverted,  and  others,  are  not 
sufficient  to  warrant  the  State  in  taking  the  whole 
business  of  banking  under  its  control.  On  the 
contrary  we  are  of  opinion  that  it  may  go  on  from 
regulation  to  prohibition  except  upon  such  con- 
ditions as  it  may  prescribe." 

OFFICIAL   PRECEDENTS 

Nor  would  the  requirement  that  banks  shall 
make  no  loan  in  which  a  director  has  a  private 
interest  impose  undue  hardships  or  restrictions 
upon  bank  du'ectors.  It  might  make  a  bank 
director  dispose  of  some  of  his  investments  and 
refrain  from  making  others;  but  it  often  happens 
that  the  holding  of  one  office  precludes  a  man 
from  holding  another,  or  compels  him  to  dispose 
of  certain  financial  interests. 

A  judge  is  disqualified  from  sitting  in  any 
case  in  which  he  has  even  the  smallest  financial 
interest;  and  most  judges,  in  order  to  be  free  to 
act  in  any  matters  arising  in  their  court,  proceed, 
upon  taking  office,  to  dispose  of  all  investments 
which  could  conceivably  bias  their  judgment 
in  any  matter  that  might  come  before  them.  An 
Interstate  Commerce  Commissioner  is  prohibited 
from  owning  any  bonds  or  stocks  in  any  corpora- 


INTERLOCKING  DIRECTORATES     67 

tion  subject  to  the  jurisdiction  of  the  Commission. 
It  is  a  serious  criminal  offence  for  any  executive 
officer  of  the  federal  government  to  transact 
government  business  with  any  corporation  in  the 
pecuniary  profits  of  which  he  is  directly  or 
indirectly  interested. 

And  the  directors  of  our  great  banking  in- 
stitutions, as  the  ultimate  judges  of  bank  credit, 
exercise  today  a  function  no  less  important  to  the 
country's  welfare  than  that  of  the  judges  of  our 
courts,  the  interstate  commerce  commissioners, 
and  departmental  heads. 

SCOPE    OF   THE    PROHIBITION 

In  the  proposals  for  legislation  on  this  subject, 
four  important  questions  are  presented: 

1.  Shall  the  principle  of  prohibiting  inter- 
locking directorates  in  potentially  competing 
corporations  be  applied  to  state  banking  insti- 
tutions, as  well  as  the  national  banks? 

2.  Shall  it  be  applied  to  all  kinds  of  corpora- 
tions or  only  to  banking  institutions? 

3.  Shall  the  principle  of  prohibiting  corpora- 
tions from  entering  into  transactions  in  which  the 
management  has  a  private  interest  be  applied  to 
both  directors  and  officers  or  be  confined  in  its 
application  to  officers  only? 


68  OTHER  PEOPLE'S  MONEY 

4.  Shall  the  principle  be  applied  so  as  to 
prohibit  transactions  with  another  corporation  in 
which  one  of  its  directors  is  interested  merely  as 
a  stockholder? 


i 


CHAPTER  IV 

SERVE  ONE  MASTER  ONLY 

The  Pujo  Committee  has  presented  the 
facts  concerning  the  Money  Trust  so  clearly 
that  the  conclusions  appear  inevitable.  Their 
diagnosis  discloses  intense  financial  concentra- 
tion and  the  means  by  which  it  is  effected. 
Combination, — the  intertwining  of  interests, — 
is  shown  to  be  the  all-pervading  vice  of  the 
present  system.  With  a  view  to  freeing  in- 
dustry, the  Committee  recommends  the  enact- 
ment of  twenty-one  specific  remedial  provisions. 
Most  of  these  measures  are  wisely  framed  to 
meet  some  abuse  disclosed  by  the  evidence;  and 
if  all  of  these  were  adopted  the  Pujo  legislation 
would  undoubtedly  alleviate  present  suffering 
and  aid  in  arresting  the  disease.  But  many  of 
the  remedies  proposed  are  ''local"  ones;  and  a 
cure  is  not  possible,  without  treatment  which  is 
fundamental.  Indeed,  a  major  operation  is 
necessary.  This  the  Committee  has  hesitated 
to  advise;  although  the  fundamental  treatment 
required  is  simple:     "Serve  one  Master  only." 


70  OTHER  PEOPLE'S  MONEY 

The  evils  incident  to  interlocking  dii-ector- 
ates  are,  of  course,  fully  recognized;  but  the 
prohibitions  proposed  in  that  respect  ai*e  re- 
stricted to  a  very  narrow  sphere. 

First:  The  Committee  recognizes  that  po- 
tentially competing  corporations  should  not 
have  a  common  director; — but  it  restricts  this 
prohibition  to  directors  of  national  banks, 
saying: 

"No  ofRcer  or  director  of  a  national  bank 
shall  be  an  officer  or  director  of  any  other  bank 
or  of  any  trust  company  or  other  financial  or 
other  corporation  or  institution,  whether  or- 
ganized under  state  or  federal  law,  that  is  author- 
ized to  receive  money  on  deposit  or  that  is  engaged 
in  the  business  of  loaning  money  on  collateral  or 
in  buying  and  selling  securities  except  as  in  this 
section  provided;  and  no  person  shall  be  an 
officer  or  director  of  any  national  bank  who  is 
a  private  banker  or  a  member  of  a  firm  or  partner- 
ship of  bankers  that  is  engaged  in  the  business  of 
receiving  deposits:  Provided,  That  such  bank, 
trust  company,  financial  institution,  banker,  or 
firm  of  bankers  is  located  at  or  engaged  in  busi- 
ness at  or  in  the  same  city,  town,  or  village  as 
that  in  which  such  national  bank  is  located  or 
engaged  in  business:  Provided  further.  That  a 


I 


SER\1E  ONE  MASTER  ONLY  71 

director  of  a  national  bank  or  a  partner  of 
such  director  may  be  an  officer  or  director  of 
not  more  than  one  trust  company  organized 
by  the  laws  of  the  state  in  which  such  national 
bank  is  engaged  in  business  and  doing  business 
at  the  same  place." 

Second:  The  Committee  recognizes  that  a 
corporation  should  not  make  a  contract  in  which 
one  of  the  management  has  a  private  interest; 
but  it  restricts  this  prohibition  (1)  to  national 
banks,  and  (2)  to  the  officers,  saying: 

*'No  national  bank  shall  lend  or  advance 
money  or  credit  or  purchase  or  discount  any 
promissory  note,  draft,  bill  of  exchange  or  other 
evidence  of  debt  bearing  the  signature  or  in- 
dorsement of  any  of  its  officers  or  of  any  partner- 
ship of  which  such  officer  is  a  member,  directly 
or  indirectly,  or  of  any  corporation  in  which 
such  officer  owns  or  has  a  beneficial  interest 
of  upward  of  ten  per  centum  of  the  capital 
stock,  or  lend  or  advance  money  or  credit  to, 
for  or  on  behalf  of  any  such  officer  or  of  any  such 
partnership  or  corporation,  or  purchase  any  se- 
curity from  any  such  officer  or  of  or  from  any 
partnership  or  corporation  of  which  such  officer 
is  a  member  or  in  which  he  is  financially  inter- 
ested, as  herein  specified,  or  of  any  corporation 


■i'Z 


OTHER  PEOPLE'S  MONEY 


of  which  any  of  its  officers  is  an  officer  at  the 
time  of  such  transaction." 

Prohibitions  of  intertwining  relations  so  re- 
stricted, however  supplemented  by  other  pro- 
visions, will  not  end  financial  concentration. 
The  Money  Trust  snake  will,  at  most,  be 
scotched,  not  killed.  The  prohibition  of  a 
common  director  in  potentially  competing  cor- 
porations should  apply  to  state  banks  and  trust 
companies,  as  well  as  to  national  banks;  and 
it  should  apply  to  railroad  and  industrial  cor- 
porations as  fully  as  to  banking  institutions. 
The  prohibition  of  corporate  contracts  in  which 
one  of  the  management  has  a  private  interest 
should  apply  to  du-ectors,  as  well  as  to  officers, 
and  to  state  banks  and  trust  companies  and 
to  other  classes  of  corporations,  as  well  as  to 
national  banks.  And,  as  will  be  hereafter  shown, 
such  broad  legislation  is  within  the  power  of 
Congress. 

Let  us  examine  this  further: 

THE    PROHIBITION    OF   COMMON    DIRECTORS  IN    PO- 
TENTIALLY COMPETING    CORPORATIONS 

1.  National  Baiiks.  The  objection  to  com- 
mon directors,  as  applied  to  banking  institutions, 
is  clearly  shown  by  the  Pujo  Committee. 


SERVE  ONE  MASTER  ONLY  73 

''As  the  first  and  foremost  step  in  applying  a 
remedy,  and  also  for  reasons  that  seem  to  us 
conclusive,  independently  of  that  consideration, 
we  recommend  that  interlocking  directorates 
in  potentially  competing  financial  institutions 
be  abolished  and  prohibited  so  far  as  lies  in 
the  power  of  Congress  to  bring  about  that  re- 
sult. .  .  .  When  we  find,  as  in  a  number 
of  instances,  the  same  man  a  director  in  half  a 
dozen  or  more  banks  and  trust  companies  all 
located  in  the  same  section  of  the  same  city, 
doing  the  same  class  of  business  and  with  a  like 
set  of  associates  similarly  situated,  all  belong- 
ing to  the  same  group  and  representing  the 
same  class  of  interests,  all  further  pretense 
of  competition  is  useless.  ...  If  banks 
serving  the  same  field  are  to  be  permitted 
to  have  common  directors,  genuine  competition 
will  be  rendered  impossible.  Besides,  this  prac- 
tice gives  to  such  common  directors  the  un- 
fair advantage  of  knowing  the  affairs  of  bor- 
rowers in  various  banks,  and  thus  affords 
endless  opportunities  for  oppression." 

This  recommendation  is  in  accordance  with 
the  legislation  or  practice  of  other  countries. 
The  Bank  of  England,  the  Bank  of  France,  the 
National    Bank    of   Belgium,    and    the   leading 


74  OTHER  PEOPLE'S  MONEY 

banks  of  Scotland  all  exclude  from  their  boards 
persons  who  are  du'ectors  in  other  banks.  By 
law,  in  Russia  no  person  is  allowed  to  be  on  the 
board  of  management  of  more  than  one  bank. 

The  Committee's  recommendation  is  also  in 
harmony  with  laws  enacted  by  the  Common- 
wealth of  Massachusetts  more  than  a  genera- 
tion ago  designed  to  curb  financial  concentra- 
tion through  the  savings  banks.  Of  the  great 
wealth  of  ^Massachusetts  a  large  part  is  repre- 
sented by  deposits  in  its  savings  banks.  These 
deposits  are  distributed  among  194  different 
banks,  located  in  131  different  cities  and  towns. 
These  194  banks  are  separate  and  distinct;  not 
only  in  form,  but  in  fact.  In  order  that  the 
banks  may  not  be  controlled  by  a  few  financiers, 
the  Massachusetts  law  provides  that  no  execu- 
tive oflScer  or  trustee  (director)  of  any  savings 
bank  can  hold  any  office  in  any  other  savings 
bank.  That  statute  was  passed  in  1876.  A  few 
years  ago  it  was  supplemented  by  providing  that 
none  of  the  executive  officers  of  a  savings  bank 
could  hold  a  similar  office  in  any  national  bank. 
Massachusetts  attempted  thus  to  curb  the  power 
of  the  individual  financier;  and  no  disadvantages 
are  discernible.  When  that  Act  was  passed  the 
aggregate    deposits   in   its   savings   banks   were 


SERVE  ONE  MASTER  ONLY  75 

$243,340,642;  the  number  of  deposit  accounts 
739,289;  the  average  deposit  to  each  person  of 
the  population  $144.  On  November  1,  1912, 
the  aggregate  deposits  were  $838,635,097.85; 
the  number  of  deposit  accounts  2,200,917;  the 
average  deposit  to  each  account  $381.04.  Mas- 
sachusetts has  shown  that  curbing  the  power  of 
the  few,  at  least  in  this  respect,  is  entirely- 
consistent  with  efficiency  and  with  the  prosperity 
of  the  whole  people. 

2.  State  Banks  and  Trust  Companies.  The 
reason  for  prohibiting  common  directors  in 
banking  institutions  applies  equally  to  national 
banks  and  to  state  banks  including  those  trust 
companies  which  are  essentially  banks.  In  New 
York  City  there  are  37  trust  companies  of  which 
only  15  are  members  of  the  clearing  house;  but 
those  15  had  on  November  2,  1912,  aggregate 
resources  of  $827,875,653.  Indeed  the  Bankers' 
Trust  Company  with  resources  of  $205,000,000, 
and  the  Guaranty  Trust  Company,  with  re- 
sources of  $232,000,000,  are  among  the  most 
useful  tools  of  the  Money  Trust.  No  bank  in 
the  country  has  larger  deposits  than  the  latter; 
and  only  one  bank  larger  deposits  than  the 
former.  If  common  directorships  were  permitted 
in  state   banks    or   such   trust  companies,    the 


76  OTHER  PEOPLE'S  MONEY 

charters  of  leading  national  banks  would  doubt- 
less soon  be  surrendered;  and  the  institutions 
would  elude  federal  control  by  re-incorporating 
under  state  laws. 

The  Pujo  Committee  has  failed  to  apply  the 
prohibition  of  common  directorships  in  po- 
tentially competing  banking  institutions  rigor- 
ously even  to  national  banks.  It  permits  the 
same  man  to  be  a  director  in  one  national  bank 
and  one  trust  company  doing  business  in  the 
same  place.  The  proposed  concession  opens  the 
door  to  grave  dangers.  In  the  first  place  the 
provision  would  permit  the  interlocking  of  any 
national  bank  not  with  one  trust  company  only, 
but  with  as  many  trust  companies  as  the  bank 
has  du'ectors.  For  while  under  the  Pujo  bill  no 
one  can  be  a  national  bank  director  who  is  di- 
rector in  more  than  one  such  trust  company, 
there  is  nothing  to  prevent  each  of  the  directors 
of  a  bank  from  becoming  a  director  in  a  differ- 
ent trust  company.  The  National  Bank  of  Com- 
merce of  New  York  has  a  board  of  38  directors. 
There  are  37  trust  companies  in  the  City  of  New 
York.  Thirty-seven  of  the  38  directors  might 
each  become  a  director  of  a  different  New  York 
trust  company:  and  thus  37  trust  companies 
would  be  interlocked  with  the  National  Bank  of 


SERVE  ONE  MASTER  ONLY  77 

Commerce,  unless  the  other  recommendation  of 
the  Pujo  Committee  limiting  the  number  of 
directors  to  13  were  also  adopted. 

But  even  if  the  bill  were  amended  so  as  to 
limit  the  possible  interlocking  of  a  bank  to  a 
single  trust  company,  the  wisdom  of  the  conces- 
sion would  still  be  doubtful.  It  is  true,  as  the 
Pujo  Committee  states,  that  ''the  business  that 
may  be  transacted  by"  a  trust  company  is  of  "a, 
different  character"  from  that  properly  trans- 
acted by  a  national  bank.  But  the  business 
actually  conducted  by  a  trust  company  is,  at 
least  in  the  East,  quite  similar;  and  the  two 
classes  of  banking  institutions  have  these  vital 
elements  in  common:  each  is  a  bank  of  deposit, 
and  each  makes  loans  from  its  deposits.  A 
private  banker  may  also  transact  some  business 
of  a  character  different  from  that  properly  con- 
ducted by  a  bank;  but  by  the  terms  of  the 
Committee's  bill  a  private  banker  engaged  in 
the  business  of  receiving  deposits  would  be 
prevented  from  being  a  director  of  a  national 
bank;  and  the  reasons  underlying  that  prohi- 
bition apply  equally  to  trust  companies  and  to 
private  bankers. 

3.  Other  Corporations.  The  interlocking  of 
banking  institutions  is  only  one  of  the  factors 


78  OTHER  PEOPLE'S  MONEY 

which  have  developed  the  Money  Trust.  The 
interlocking  of  other  corporations  has  been  an 
equally  important  element.  And  the  prohibi- 
tion of  interlocking  directorates  should  be  ex- 
tended to  potentially  competing  corporations 
whatever  the  class;  to  life  insurance  companies, 
railroads  and  industrial  companies,  as  well  as 
banking  institutions.  The  Pujo  Committee  has 
shown  that  Mr.  George  F.  Baker  is  a  common 
director  in  the  six  railroads  which  haul  80  per 
cent,  of  all  anthracite  marketed  and  own  88 
per  cent,  of  all  anthracite  deposits.  The  Mor- 
gan associates  are  the  nexus  between  such  sup- 
posedly competing  railroads  as  the  Northern 
Pacific  and  the  Great  Northern;  the  Southern, 
the  Louisville  &  Nashville  and  the  Atlantic 
Coast  Line,  and  between  partially  competing 
industrials  like  the  Wcstinghouse  Electric  and 
IManufacturing  Company  and  the  General  Elec- 
tric. The  ?iexus  between  all  the  large  poten- 
tially competing  corporations  must  be  severed, 
if  the  Money  Trust  is  to  be  broken. 

PROHIBITING  CORPORATE  CONTRACTS  IN  WHICH  THE 
MANAGEMENT  HAS  A  PRIVATE   INTEREST 

The  principle  of  prohibiting  corporate  contracts 
in  which  the  management  has  a  private  interest 


SERVE  ONE  MASTER  ONLY  79 

is  applied,  in  the  Pujo  Committee's  recom- 
mendations, only  to  national  banks,  and  in  them 
only  to  officers.  All  other  corporations  are  to  be 
permitted  to  continue  the  practice;  and  even  in 
national  banks  the  directors  are  to  be  free  to 
have  a  conflicting  private  interest,  except  that 
they  must  not  accept  compensation  for  promoting 
a  loan  of  bank  funds  nor  participate  in  syndicates, 
promotions  or  underwriting  of  securities  in  which 
their  banks  may  be  interested  as  underwriters  or 
owners  or  lenders  thereon:  that  all  loans  or  other 
transactions  in  which  a  director  is  interested  shall 
be  made  in  his  own  name;  and  shall  be  authorized 
only  after  ample  notice  to  co-directors;  and  that 
the  facts  shall  be  spread  upon  the  records  of  the 
corporation. 

The  Money  Trust  would  not  be  disturbed  by  a 
prohibition  limited  to  officers.  Under  a  law  of 
that  character,  financial  control  would  continue 
to  be  exercised  by  the  few  without  substantial 
impairment;  but  the  power  would  be  exerted 
through  a  somewhat  different  channel.  Bank 
officers  are  appointees  of  the  directors;  and 
ordinarily  their  obedient  servants.  Individuals 
who,  as  bank  officers,  are  now  important  factors 
in  the  financial  concentration,  would  doubtless 
resign  as  officers  and  become  merely  directors. 


80  OTHER  PEOPLE'S  MONEY 

The  loss  of  official  salaries  involved  could  be 
easily  compensated.  No  member  of  the  firm  of 
J.  P.  Morgan  &  Co.  is  an  officer  in  any  one  of 
the  thirteen  banking  institutions  with  aggregate 
resources  of  S1,2S3,000,000,  through  which  as 
directors  they  carry  on  their  vast  operations.  A 
prohibition  limited  to  officers  would  not  affect  the 
Morgan  operations  with  these  banking  institu- 
tions. If  there  were  minority  representation  on 
bank  boards  (which  the  Pujo  Committee  wisely 
advocates),  such  a  provision  might  afford  some 
protection  to  stockholders  through  the  vigilance 
of  the  minority  directors  preventing  the  dominant 
directors  using  their  power  to  the  injury  of  the 
minority  stockholders.  But  even  then,  the  pro- 
vision would  not  safeguard  the  public;  and  the 
primary  purpose  of  Money  Trust  legislation  is 
not  to  prevent  directors  from  injuring  stockhold- 
ers; but  to  prevent  their  injuring  the  pubhc 
through  the  intertwined  control  of  the  banks. 
No  prohibition  limited  to  officers  will  materially 
change  this  condition. 

The  prohibition  of  interlocking  directorates, 
even  if  applied  only  to  all  banks  and  trust  com- 
panies, would  practically  compel  the  Morgan 
representatives  to  resign  from  the  directorates  of 
the  thirteen  l)anking  institutions  with  which  they 


SERVE  ONE  MASTER  ONLY  81 

are  connected,  or  from  the  directorates  of  all  the 
railroads,  express,  steamship,  public  utility,  manu- 
facturing, and  other  corporations  which  do  busi- 
ness with  those  banks  and  trust  companies. 
Whether  they  resigned  from  the  one  or  the  other 
class  of  corporations,  the  endless  chain  would  be 
broken  into  many  pieces.  And  whether  they  re- 
tired or  not,  the  Morgan  power  would  obviously  be 
greatly  lessened:  for  if  they  did  not  retire,  their 
field  of  operations  would  be  greatly  narrowed. 

APPLY  THE  PRIVATE  INTEREST  PROHIBITION  TO  ALL 
KINDS   OF   CORPORATIONS 

The  creation  of  the  Money  Trust  is  due  quite 
as  much  to  the  encroachment  of  the  investment 
banker  upon  railroads,  public  service,  industrial, 
and  life-insurance  companies,  as  to  his  control  of 
banks  and  trust  companies.  Before  the  Money 
Trust  can  be  broken,  all  these  relations  must  be 
severed.  And  they  cannot  be  severed  unless 
corporations  of  each  of  these  several  classes  are 
prevented  from  dealing  with  their  own  directors 
and  with  corporations  in  which  those  directors 
are  interested.  For  instance:  The  most  potent 
single  source  of  J.  P.  Morgan  &  Co.'s  power  is 
the  $162,500,000  deposits,  including  those  of  78 
interstate  railroad,  public-service  and  industrial 


82  OTHER  PEOPLE'S  MONEY 

corporations,  which  the  Morgan  firm  is  free  to 
use  as  it  sees  fit.  The  proposed  proliibition,  even 
if  applied  to  all  banking  institutions,  would  not 
afifect  directly  this  great  source  of  Morgan  power. 
If,  however,  the  prohibition  is  made  to  include 
railroad,  public-service,  and  industrial  corpora- 
tions, as  well  as  banking  institutions,  members  of 
J.  P.  IVIorgan  &  Co.  will  quickly  retire  from 
substantially  all  boards  of  directors. 

APPLY    THE     PRIVATE    INTEREST    PROHIBITION    TO 
STOCKHOLDING   INTERESTS 

The  prohibition  against  one  corporation  enter- 
ing into  transactions  with  another  corporation  in 
which  one  of  its  directors  is  also  interested, 
should  apply  even  if  his  interest  in  the  second 
corporation  is  merely  that  of  stockholder.  A 
conflict  of  interests  in  a  director  may  be  just 
as  serious  where  he  is  a  stockholder  only  in 
the  second  corporation,  as  if  he  were  also  a 
director. 

One  of  the  annoying  petty  monopolies,  con- 
cerning which  evidence  was  taken  by  the  Pujo 
Committee,  is  the  exclusive  privilege  granted  to 
the  American  Bank  Note  Company  by  the  New 
York  8tock  Exchange.  A  recent  $60,000,000 
issue  of  New  York  City  bonds  was  denied  listing 


SERVE  ONE  MASTER  ONLY  83 

on  the  Exchange,  because  the  city  refused  to 
submit  to  an  exaction  of  $55,800  by  the  Ameri- 
can Company  for  engraving  the  bonds,  when  the 
New  York  Bank  Note  Company  would  do  the 
work  equally  well  for  $44,500.  As  tending  to 
explain  this  extraordinary  monopoly,  it  was 
shown  that  men  prominent  in  the  financial  world 
were  stockholders  in  the  American  Company. 
Among  the  largest  stockholders  was  Mr.  Morgan, 
with  6,000  shares.  No  member  of  the  Morgan 
firm  was  a  director  of  the  American  Company; 
but  there  was  sufficient  influence  exerted  some- 
how to  give  the  American  Company  the  stock 
exchange  monopoly. 

The  Pujo  Committee,  while  failing  to  recom- 
mend that  transactions  in  which  a  director  has  a 
private  interest  be  prohibited,  recognizes  that  a 
stockholder's  interest  of  more  than  a  certain  size 
may  be  as  potent  an  instrument  of  influence 
as  a  direct  personal  interest;  for  it  recommends 
that: 

"Borrowings,  directly  or  indirectly  by  .  .  . 
any  corporation  of  the  stock  of  which  he  (a  bank 
director)  holds  upwards  of  10  per  cent,  from  the 
bank  of  which  he  is  such  director,  should  only  be 
permitted,  on  condition  that  notice  shall  have 


84  OTHER  PEOPLE'S  MONEY 

been  given  to  his  co-directors  and  that  a  full 
statement  of  the  transaction  shall  be  entered 
upon  the  minutes  of  the  meeting  at  which  such 
loan  was  authorized." 

As  shown  above,  the  particular  provision  for 
notice  affords  no  protection  to  the  public;  but 
if  it  did,  its  application  ought  to  be  extended 
to  lesser  stock-holdings.  Indeed  it  is  difficult  to 
fix  a  limit  so  low  that  financial  interest  will  not 
influence  action.  Certainly  a  stockholding  in- 
terest of  a  single  director,  much  smaller  than  10 
per  cent.,  might  be  most  effective  in  inducing 
favors.  IVIr.  Morgan's  stockholdings  in  the 
American  Bank  Note  Company  was  only  three 
per  cent.  The  $6,000,000  investment  of  J.  P. 
Morgan  &  Co.  in  the  National  City  Bank  repre- 
sented only  6  per  cent,  of  the  bank's  stock; 
and  would  undoubtedly  have  been  effective, 
even  if  it  had  not  been  supplemented  by  the 
election  of  his  son  to  the  board  of  directors. 

SPECIAL   DISQUALIFICATIONS 

The  Stanley  Committee,  after  investigation  of 
the  Steel  Trust,  concluded  that  the  evils  of  inter- 
locking directorates  were  so  serious  that  repre- 
sentatives of  certain  industries  which  arc  largely 


SERVE  ONE  MASTER  ONLY  85 

dependent  upon  railroads  should  be  absolutely 
prohibited  from  serving  as  railroad  directors, 
officers  or  employees.  It,  therefore,  proposed  to 
disqualify  as  railroad  director,  officer  or  employee 
any  person  engaged  in  the  business  of  manufactur- 
ing or  selling  railroad  cars  or  locomotives,  railroad 
rail  or  structural  steel,  or  in  mining  and  selling 
coal.  The  drastic  Stanley  bill,  shows  how  great 
is  the  desire  to  do  away  with  present  abuses  and 
to  lessen  the  power  of  the  Money  Trust. 

Directors,  officers,  and  employees  of  banking 
institutions  should,  by  a  similar  provision,  be 
disqualified  from  acting  as  directors,  officers  or 
employees  of  life-insurance  companies.  The 
Armstrong  investigation  showed  that  life-in- 
surance companies  were  in  1905  the  most  potent 
factor  in  financial  concentration.  Their  power 
was  exercised  largely  through  the  banks  and 
trust  companies  which  they  controlled  by  stock 
ownership  and  their  huge  deposits.  The  Arm- 
strong legislation  directed  life-insurance  com- 
panies to  sell  their  stocks.  The  Mutual  Life  and 
the  Equitable  did  so  in  part.  But  the  Morgan 
associates  bought  the  stocks.  And  now,  instead 
of  the  life-insurance  companies  controlling  the 
banks  and  trust  companies,  the  latter  and  the 
bankers  control  the  life-insurance  companies. 


86  OTHER  PEOPLE'S  MONEY 

HOW    THE     PROHIBITION    MAT    BE    LIMITED 

The  Money  Trust  cannot  be  destroyed  unless 
all  classes  of  corporations  are  included  in  the 
prohibition  of  interlocking  directors  and  of 
transactions  by  corporations  in  which  the  man- 
agement has  a  private  interest.  But  it  does  not 
follow  that  the  prohibition  must  apply  to  every 
corporation  of  each  class.  Certain  exceptions 
are  entirely  consistent  with  merely  protecting  the 
public  against  the  Money  Trust;  although  pro- 
tection of  minority  stockholders  and  business 
ethics  demand  that  the  rule  prohibiting  a  cor- 
poration from  making  contracts  in  which  a  di- 
rector has  a  private  financial  interest  should  be 
universal  in  its  application.  The  number  of 
corporations  in  the  United  States  Dec.  31,  1912, 
was  305,336.  Of  these  only  1610  have  a  capi- 
tal of  more  than  $5,000,000.  Few  corporations 
(other  than  banks)  with  a  capital  of  less  than 
$5,000,000  could  appreciably  affect  general  credit 
conditions  either  through  their  own  operations 
or  their  affiliations.  Corporations  (other  than 
banks)  with  capital  resources  of  less  than  $5,000,- 
000  might,  therefore,  be  excluded  from  the  scope 
of  the  statute  for  the  present.  The  prohibition 
could  also  be  limited  so  as  not  to  apply  to  any 


SERVE  ONE  MASTER  ONLY  87 

industrial  concern,  regardless  of  the  amount  of 
capital  and  resources,  doing  only  an  intrastate 
business;  as  practically  all  large  industrial  cor- 
porations are  engaged  in  interstate  commerce. 
This  would  exclude  some  retail  concerns  and 
local  jobbers  and  manufacturers  not  otherwise 
excluded  from  the  operation  of  the  act.  Like- 
wise banks  and  trust  companies  located  in  cities 
of  less  than  100,000  inhabitants  might,  if  thought 
advisable,  be  excluded,  for  the  present  if  their 
capital  is  less  than  S500,000,  and  their  resources 
less  than,  say,  $2,500,000.  In  larger  cities  even 
the  smaller  banking  institutions  should  be  sub- 
ject to  the  law.  Such  exceptions  should  over- 
come any  objection  which  might  be  raised  that 
in  some  smaller  cities,  the  prohibition  of  inter- 
locking directorates  would  exclude  from  the 
bank  directorates  all  the  able  business  men  of 
the  community  through  fear  of  losing  the  oppor- 
tunity of  bank  accommodations. 

An  exception  should  also  be  made,  so  as  to 
permit  interlocking  directorates  between  a  cor- 
poration and  its  proper  subsidiaries.  And  the 
prohibition  of  transactions  in  which  the  manage- 
ment has  a  private  interest  should,  of  course,  not 
apply  to  contracts,  express  or  implied,  for  such 
services  as   are  performed   indiscriminately  for 


88  OTHER  PEOPLE'S  MONEY 

the  whole  community  by  raih-oads  and  public 
service  corporations,  or  for  services,  common  to 
all  customers,  like  the  ordinary  service  of  a  bank 
for  its  depositors. 

THE   POWER   OF   CONGRESS 

The  question  may  be  asked:  Has  Congress 
the  power  to  impose  these  limitations  upon  the 
conduct  of  any  business  other  than  national 
banks?  And  if  the  power  of  Congress  is  so  lim- 
ited, will  not  the  dominant  financiers,  upon  the 
enactment  of  such  a  law,  convert  their  national 
banks  into  state  banks  or  trust  companies,  and 
thus  escape  from  congressional  control? 

The  answer  to  both  questions  is  clear.  Con- 
gress has  ample  power  to  impose  such  prohibitions 
upon  practically  all  corporations,  including  state 
banks,  trust  companies  and  life  insurance  com- 
panies; and  evasion  may  be  made  impossible. 
While  Congress  has  not  been  granted  power  to 
regulate  directly  state  banks,  and  trust  or  life 
insurance  companies,  or  railroad,  public-service 
and  industrial  corporations,  except  in  respect  to 
interstate  commerce,  it  may  do  so  indirectly 
by  virtue  either  of  its  control  of  the  mail  privilege 
or  through  the  taxing  power. 

Practically  no  business  in  the  United  States  can 


SERVE  ONE  MASTER  ONLY  89 

be  conducted  without  use  of  the  mails;  and  Con- 
gress may  in  its  reasonable  discretion  deny  the 
use  of  the  mail  to  any  business  which  is  con- 
ducted under  conditions  deemed  by  Congress 
to  be  injurious  to  the  public  welfare.  Thus, 
Congress  has  no  power  directly  to  suppress  lot- 
teries ;  but  it  has  indirectly  suppressed  them  by 
denying,  under  heavy  penalty,  the  use  of  the 
mail  to  lottery  enterprises.  Congress  has  no 
power  to  suppress  directly  business  frauds;  but 
it  is  constantly  doing  so  indirectly  by  issuing 
fraud-orders  denying  the  mail  privilege.  Con- 
gress has  no  direct  power  to  require  a  newspaper 
to  publish  a  list  of  its  proprietors  and  the  amount 
of  its  circulation,  or  to  require  it  to  mark  paid- 
matter  distinctly  as  advertising:  But  it  has  thus 
regulated  the  press,  by  denying  the  second-class 
mail  privilege,  to  all  publications  which  fail  to 
comply  with  the  requirements  prescribed. 

The  taxing  power  has  been  resorted  to  by  Con- 
gress for  like  purposes:  Congress  has  no  power 
to  regulate  the  manufacture  of  matches,  or  the 
use  of  oleomargarine;  but  it  has  suppressed  the 
manufacture  of  the  "white  phosphorous"  match 
and  has  greatly  lessened  the  use  of  oleomargarine 
by  imposing  heavy  taxes  upon  them.     Congress 


90  OTHER  PEOPLE'S  MONEY 

has  no  power  to  prohibit,  or  to  regulate  directly 
the  issue  of  bank  notes  by  state  banks,  but  it 
indirectly  prohibited  their  issue  by  imposing  a 
tax  of  ten  per  cent,  upon  any  bank  note  issued  by 
a  state  bank. 

The  power  of  Congress  over  interstate  com- 
merce has  been  similarly  utilized.  Congress 
cannot  ordinarily  provide  compensation  for  ac- 
cidents to  employees  or  undertake  directly  to 
suppress  prostitution;  but  it  has,  as  an  inci- 
dent of  regulating  interstate  commerce,  enacted 
the  Railroad  Employers'  Liability  law  and  the 
White  Slave  Law;  and  it  has  full  power  over 
the  instrumentalities  of  commerce,  like  the 
telegraph  and  the  telephone. 

As  such  exercise  of  congressional  power  has 
been  common  for,  at  least,  half  a  century.  Con- 
gress should  not  hesitate  now  to  employ  it  where 
its  exercise  is  urgently  needed.  For  a  compre- 
hensive prohibition  of  interlocking  directorates  is 
an  essential  condition  of  our  attaining  the  New 
Freedom.  Such  a  law  would  involve  a  great 
change  in  the  relation  of  the  leading  banks  and 
bankers  to  other  businesses.  But  it  is  the  very 
purpose  of  Money  Trust  legislation  to  effect  a 
great  change;  and  unless  it  does  so,  the  power  of 
our  financial  oligarchy  cannot  be  broken. 


SERVE  ONE  MASTER  ONLY  91 

But  though  the  enactment  of  such  a  law  is 
essential  to  the  emancipation  of  business,  it  will 
not  alone  restore  industrial  liberty.  It  must  be 
supplemented  by  other  remedial  measures. 


CHAPTER  V 
WHAT  PUBLICITY  CAN  DO 

Publicity  is  justly  commended  as  a  remedy  for 
social  and  industrial  diseases.  Sunlight  is  said 
to  be  the  best  of  disinfectants;  electric  light  the 
most  efficient  policeman.  And  publicity  has 
already  played  an  important  part  in  the  struggle 
against  the  Money  Trust.  The  Pujo  Committee 
has,  in  the  disclosure  of  the  facts  concerning 
financial  concentration,  made  a  most  important 
contribution  toward  attainment  of  the  New 
Freedom.  The  battlefield  has  been  surveyed  and 
charted.  The  hostile  forces  have  been  located, 
counted  and  appraised.  That  was  a  necessary 
first  step — and  a  long  one — towards  relief.  The 
provisions  in  the  Committee's  bill  concerning  the 
incorporation  of  stock  exchanges  and  the  state- 
ment to  be  made  in  connection  with  the  listing  of 
securities  would  doubtless  have  a  beneficent  effect. 
But  there  should  be  a  further  call  upon  publicity 
for  service.  That  potent  force  must,  in  the  im- 
pending struggle,  be  utilized  in  many  ways  as  a 
continuous  remedial  measure. 

02 


WHAT  PUBLICITY  CAN  DO  93 

WEALTH 

Combination  and  control  of  other  people's 
money  and  of  other  people's  businesses.  These 
are  the  main  factors  in  the  development  of  the 
Money  Trust.  But  the  wealth  of  the  invest- 
ment banker  is  also  a  factor.  And  with  the  ex- 
traordinary growth  of  his  wealth  in  recent 
years,  the  relative  importance  of  wealth  as  a 
factor  in  financial  concentration  has  grown 
steadily.  It  was  wealth  which  enabled  Mr. 
Morgan,  in  1910,  to  pay  $3,000,000  for  $51,000 
par  value  of  the  stock  of  the  Equitable  Life 
Insurance  Society.  His  direct  income  from  this 
investment  was  limited  by  law  to  less  than  one- 
eighth  of  one  per  cent,  a  year;  but  it  gave  legal 
control  of  $504,000,000,  of  assets.  It  was  wealth 
which  enabled  the  Morgan  associates  to  buy  from 
the  Equitable  and  the  Mutual  Life  Insurance 
Company  the  stocks  in  the  several  banking  in- 
stitutions, which,  merged  in  the  Bankers'  Trust 
Company  and  the  Guaranty  Trust  Company, 
gave  them  control  of  $357,000,000  deposits. 
It  was  wealth  which  enabled  Mr.  Morgan  to 
acquire  his  shares  in  the  First  National  and 
National  City  banks,  worth  $21,000,000,  through 
which  he  cemented  the  triple  alliance  with  those 
institutions. 


94  OTHER  PEOPLE'S  MONEY 

Xow,  how  has  this  great  wealth  been  accu- 
mulated? Some  of  it  was  natural  accretion. 
Some  of  it  is  due  to  special  opportunities  for 
investment  wisely  availed  of.  Some  of  it  is  due 
to  the  vast  extent  of  the  bankers'  operations. 
Then  power  breeds  wealth  as  wealth  breeds 
power.  But  a  main  cause  of  these  large  fortunes 
is  the  huge  tolls  taken  by  those  who  control  the 
avenues  to  capital  and  to  investors.  There  has 
been  exacted  as  toll  literally  "all  that  the  traffic 
will  bear." 

EXCESSIVE   bankers'    COMMISSIONS 

The  Pujo  Committee  was  unfortunately  pre- 
vented by  lack  of  time  from  presenting  to  the 
country  the  evidence  covering  the  amounts  taken 
by  the  investment  bankers  as  promoters'  fees, 
underwriting  commissions  and  profits.  Noth- 
ing could  have  demonstrated  so  clearly  the  power 
exercised  by  the  bankers,  as  a  schedule  showing 
the  aggregate  of  these  taxes  levied  within  recent 
years.  It  would  be  well  worth  while  now  to  re- 
open the  Money  Trust  investigation  merely  to 
collect  these  data.  But  earlier  investigations 
have  disclosed  some  illuminating,  though  spor- 
adic facts. 

The  syndicate  which  jH'omoted  the  Steel  Trust, 


WHAT  PUBLICITY  CAN  DO  95 

took,  as  compensation  for  a  few  weeks'  work, 
securities  yielding  $62,500,000  in  cash; and  of  this, 
J.  P.  Morgan  &  Co.  received  for  their  services,  as 
Syndicate  Managers,  $12,500,000,  besides  their 
share,  as  syndicate  subscribers,  in  the  remaining 
$50,000,000.  The  Morgan  syndicate  took  for 
promoting  the  Tube  Trust  $20,000,000  common 
stock  out  of  a  total  issue  of  $80,000,000  stock 
(preferred  and  common).  Nor  were  monster 
commissions  limited  to  trust  promotions.  More 
recently,  bankers'  syndicates  have,  in  many  in- 
stances, received  for  floating  preferred  stocks 
of  recapitalized  industrial  concerns,  one-third 
of  all  common  stock  issued,  besides  a  considerable 
sum  in  cash.  And  for  the  sale  of  preferred  stock 
of  well  established  manufacturing  concerns,  cash 
commissions  (or  profits)  of  from  7  1/2  to  10  per 
cent,  of  the  cash  raised  are  often  exacted.  On 
bonds  of  high-class  industrial  concerns,  bankers' 
commissions  (or  profits)  of  from  5  to  10  points 
have  been  common. 

Nor  have  these  heavy  charges  been  confined 
to  industrial  concerns.  Even  railroad  securities, 
supposedly  of  high  grade,  have  been  subjected  to 
like  burdens.  At  a  time  when  the  New  Haven's 
credit  was  still  unimpaired,  J.  P.  Morgan  &  Co. 
took  the  New  York,  Westchester  &  Boston  Rail- 


96  OTHER  PEOPLE'S  MONEY 

way  first  mortgage  bonds,  guaranteed  by  the 
New  Haven  at  92  1/2;  and  they  were  marketed 
at  96  1/4.  They  took  the  Portland  Terminal 
Company  bonds,  guaranteed  by  the  jNIaine  Cen- 
tral Railroad — a  corporation  of  unquestionable 
credit — at  about  88,  and  these  were  marketed 
at  92. 

A  large  part  of  these  under^vTiting  commis- 
sions is  taken  by  the  great  banking  houses,  not 
for  their  services  in  selling  the  bonds,  nor  in  as- 
suming risks,  but  for  securing  others  to  sell  the 
bonds  and  incur  risks.  Thus  when  the  Inter- 
boro  Railway — a  most  prosperous  corporation 
— financed  its  recent  §170,000,000  bond  issue, 
J.  P.  Morgan  &  Co.  received  a  3  per  cent,  com- 
mission, that  is,  $5,100,000,  practically  for  ar- 
ranging that  others  should  underwrite  and  sell 
the  bonds. 

The  aggregate  commissions  or  profits  so  taken 
by  leading  banking  houses  can  only  be  conjec- 
tured, as  the  full  amount  of  their  transactions 
has  not  been  disclosed,  and  the  rate  of  com- 
mission or  profit  varies  very  widely.  But  the 
Pujo  Committee  has  supplied  some  interesting 
data  bearing  upon  the  subject:  Counting  the 
issues  of  securities  of  interstate  corporations 
only,  J.  P.  Morgan  &  Co.  directly  procured  the 


WHAT  PUBLICITY  CAN  DO  97 

public  marketing  alone  or  in  conjunction  with 
others  during  the  years  1902-1912,  of  $1,950,- 
000,000.  What  the  average  commission  or  profit 
taken  by  J.  P.  Morgan  &  Co.  was  we  do  not  know; 
but  we  do  know  that  every  one  per  cent,  on  that 
sum  yields  $19,500,000.  Yet  even  that  huge 
aggregate  of  $1,950,000,000  includes  only  a  part 
of  the  securities  on  which  commissions  or  profits 
were  paid.  It  does  not  include  any  issue  of 
an  intrastate  corporation.  It  does  not  include 
any  securities  privately  marketed.  It  does  not 
include  any  government,  state  or  municipal  bonds. 
It  is  to  exactions  such  as  these  that  the  wealth 
of  the  investment  banker  is  in  large  part  due. 
And  since  this  wealth  is  an  important  factor  in 
the  creation  of  the  power  exercised  by  the  Money 
Trust,  we  must  endeavor  to  put  an  end  to  this 
improper  wealth  getting,  as  well  as  to  improper 
combination.  The  Money  Trust  is  so  powerful 
and  so  firmly  entrenched,  that  each  of  the  sources 
of  its  undue  power  must  be  effectually  stopped, 
if  we  would  attain  the  New  Freedom. 

HOW  SHALL  EXCESSIVE  CHARGES  BE  STOPPED? 

The  Pujo  Committee  recommends,  as  a  remedy 
for  such  excessive  charges,  that  interstate  cor- 
porations be  prohibited  from  entering  into  any 


98  OTHER  PEOPLE'S  MONEY 

agreements  creating  a  sole  fiscal  agent  to  dispose 
of  their  security  issues;  that  the  issue  of  the 
securities  of  interstate  railroads  be  placed  under 
the  supervision  of  the  Interstate  Commerce 
Commission;  and  that  their  securities  should  be 
disposed  of  only  upon  public  or  private  competi- 
tive bids,  or  under  regulations  to  be  prescribed 
by  the  Commission  with  full  powers  of  investi- 
gation that  will  discover  and  punish  combina- 
tions which  prevent  competition  in  bidding. 
Some  of  the  state  public-service  commissions 
now  exercise  such  power;  and  it  may  possibly 
be  wise  to  confer  this  power  upon  the  interstate 
commission,  although  the  recommendation  of  the 
Hadley  Railroad  Securities  Commission  are  to 
the  contrar3\  But  the  official  regulation  as  pro- 
posed by  the  Pujo  Committee  would  be  confined 
to  railroad  corporations;  and  the  new  security 
issues  of  other  corporations  listed  on  the  New 
York  Stock  Exchange  have  aggregated  in  the 
last  five  years  $4,525,404,025,  which  is  more  than 
cither  the  jailroad  or  the  municipal  issues. 
Publicity  ofi'crs,  however,  another  and  even  more 
promising  remedy:  a  method  of  regulating 
bankers'  charges  which  would  apply  automa- 
tically to  railroad,  public-service  and  industrial 
corporations  alike. 


WHAT  PUBLICITY  CAN  DO  99 

The  question  may  be  asked:  Why  have  these 
excessive  charges  been  submitted  to?  Corpora- 
tions,  which  in  the  first  instance  bear  the  charges 
for  capital,  have,  doubtless,  submitted  because 
of  banker-control;  exercised  directly  through 
interlocking  directorates,  or  kindred  relations, 
and  indirectly  through  combinations  among 
bankers  to  suppress  competition.  But  why  have 
the  investors  submitted,  since  ultimately  all 
these  charges  are  borne  by  the  investors,  except 
so  far  as  corporations  succeed  in  shifting  the 
burden  upon  the  community?  The  large  army 
of  small  investors,  constituting  a  substantial 
majority  of  all  security  buyers,  are  entirely  free 
from  banker  control.  Their  submission  is  un- 
doubtedly due,  in  part,  to  the  fact  that  the 
bankers  control  the  avenues  to  recognizedly  safe 
investments  almost  as  fully  as  they  do  the 
avenues  to  capital.  But  the  investor's  serviUty 
is  due  partly,  also,  to  his  ignorance  of  the 
facts.  Is  it  not  probable  that,  if  each  in- 
vestor knew  the  extent  to  which  the  seciu-ity  he 
buys  from  the  banker  is  diluted  by  excessive 
underwritings,  commissions  and  profits,  there 
would  be  a  strike  of  capital  against  these  unjust 
exactions? 


100         OTHER  PEOPLE'S  MONEY 

THE    STRIKE    OF    CAPITAL 

A  recent  British  experience  supports  this 
view.  In  a  brief  period  last  spring  nine  differ- 
ent issues,  aggregating  $135,840,000,  were  offered 
by  syndicates  on  the  London  market,  and  on  the 
average  only  about  10  per  cent,  of  these  loans 
was  taken  by  the  public.  Money  was  "tight," 
but  the  rates  of  interest  offered  were  very  liberal, 
and  no  one  doubted  that  the  investors  were 
well  supplied  with  funds.  The  London  Daily 
Mail  presented  an  explanation: 

"The  long  series  of  rebuffs  to  new  loans  at  the 
hands  of  investors  reached  a  climax  in  the  ill 
success  of  the  great  Rothschild  issue.  It  will 
remain  a  topic  of  financial  discussion  for  many 
days,  and  many  in  the  city  are  expressing  the 
opinion  that  it  may  have  a  revolutionary  effect 
upon  the  present  system  of  loan  issuing  and 
underwriting.  The  question  being  discussed  is 
that  the  public  have  become  loth  to  subscribe 
for  stock  which  they  believe  the  underwriters  can 
afford,  by  reason  of  the  commission  they  receive, 
to  sell  subsetjuontly  at  a  lower  price  than  the 
issue  price,  and  tliat  the  Stock  Exchange  has 
begun  to  realize  the  public's  attitude.     The  public 


WHAT  PUBLICITY  CAN  DO        101 

sees  in  the  underwriter  not  so  much  one  who  in- 
sures that  the  loan  shall  be  subscribed  in  return 
for  its  commission  as  a  middleman,  who,  as  it 
were,  has  an  opportunity  of  obtaining  stock  at 
a  lower  price  than  the  public  in  order  that  he 
may  pass  it  off  at  a  profit  subsequently.  They 
prefer  not  to  subscribe,  but  to  await  an  oppor- 
tunity of  dividing  that  profit.  They  feel  that 
if,  when  these  issues  were  made,  the  stock  were 
offered  them  at  a  more  attractive  price,  there 
would  be  less  need  to  pay  the  underwriters  so 
high  commissions.  It  is  another  practical  pro- 
test, if  indirect,  against  the  existence  of  the 
middleman,  which  protest  is  one  of  the  features 
of  present-day  finance." 

PUBLICITY   AS   A   EEMEDY 

Compel  bankers  when  issuing  securities  to 
make  public  the  commissions  or  profits  they  are 
receiving.  Let  every  circular  letter,  prospectus 
or  advertisement  of  a  bond  or  stock  show  clearly 
what  the  banker  received  for  his  middleman- 
services,  and  what  the  bonds  and  stocks  net 
the  issuing  corporation.  That  is  knowledge  to 
which  both  the  existing  security  holder  and  the 
prospective  purchaser  is  fairly  entitled.  If  the 
bankers'   compensation  is  reasonable,   consider- 


102  OTHER  PEOPLE'S  MONEY 

ing  the  skill  and  risk  involved,  there  can  be  no 
objection  to  making  it  known.  If  it  is  not 
reasonable,  the  investor  will  ''strike,"  as  in- 
vestors seem  to  have  done  recently  in  England. 

Such  disclosures  of  bankers'  commissions  or 
profits  is  demanded  also  for  another  reason:  It 
will  aid  the  investor  in  judging  of  the  safety  of 
the  investment.  In  the  marketing  of  securities 
there  are  two  classes  of  risks:  One  is  the  risk 
whether  the  banker  (or  the  corporation)  will  find 
ready  purchasers  for  the  bonds  or  stock  at  the 
issue  price;  the  other  whether  the  investor  will 
get  a  good  article.  The  maker  of  the  security 
and  the  banker  are  interested  chiefly  in  getting  it 
sold  at  the  issue  price.  The  investor  is  interested 
chiefly  in  buying  a  good  article.  The  small 
investor  relies  almost  exclusively  upon  the  banker 
for  his  knowledge  and  judgment  as  to  the  quality 
of  the  security;  and  it  is  this  which  makes  his 
relation  to  the  banker  one  of  confidence.  But 
at  present,  the  investment  banker  occupies  a 
position  inconsistent  with  that  relation.  The 
bankers'  compensation  should,  of  course,  vary 
according  to  the  risk  he  assumes.  Where  there 
is  a  large  risk  that  the  bonds  or  stock  will  not  be 
promptly  sold  at  the  issue  price,  the  underwriting 
commission    (that    is    the    insurance    premium) 


WHAT  PUBLICITY  CAN  DO        103 

should  be  correspondingly  large.  But  the  banker 
ought  not  to  be  paid  more  for  getting  investors 
to  assume  a  larger  risk.  In  practice  the  banker 
gets  the  higher  commission  for  underwriting  the 
weaker  security,  on  the  ground  -that  his  own  risk 
is  greater.  And  the  weaker  the  security,  the 
greater  is  the  banker's  incentive  to  induce  his 
customers  to  relieve  him.  Now  the  law  should 
not  undertake  (except  incidentally  in  connection 
with  railroads  and  public-service  corporations)  to 
fix  bankers'  profits.  And  it  should  not  seek  to 
prevent  investors  from  making  bad  bargains. 
But  it  is  now  recognized  in  the  simplest  mer- 
chandising, that  there  should  be  full  disclosures. 
The  archaic  doctrine  of  caveat  emptor  is  vanishing. 
The  law  has  begun  to  require  publicity  in  aid  of 
fair  dealing.  The  Federal  Pure  Food  Law  does 
not  guarantee  quality  or  prices;  but  it  helps  the 
buyer  to  judge  of  quality  by  requiring  disclosure 
of  ingredients.  Among  the  most  important  facts 
to  be  learned  for  determining  the  real  value  of  a 
seciu-ity  is  the  amount  of  water  it  contains. 
And  any  excessive  amount  paid  to  the  banker 
for  marketing  a  security  is  water.  Require  a 
full  disclosure  to  the  investor  of  the  amount  of 
commissions  and  profits  paid;  and  not  only  will 
investors  be  put  on  their  guard,  but  bankers' 


104  OTHER  PEOPLE'S  MONEY 

compensation  will  tend  to  adjust  itself  auto- 
matically to  what  is  fair  and  reasonable.  Ex- 
cessive commissions — this  form  of  unjustly  ac- 
quired wealth — will  in  large  part  cease. 

REAL   DISCLOSURE 

But  the  disclosure  must  be  real.  And  it  must 
be  a  disclosure  to  the  investor.  It  will  not  suffice 
to  require  merely  the  filing  of  a  statement  of  facts 
with  the  Commissioner  of  Corporations  or  with 
a  score  of  other  officials,  federal  and  state.  That 
would  be  almost  as  ineffective  as  if  the  Pure  Food 
Law  required  a  manufactm-er  merely  to  deposit 
with  the  Department  a  statement  of  ingredients, 
instead  of  requiring  the  label  to  tell  the  story. 
Nor  would  the  filing  of  a  full  statement  with  the 
Stock  Exchange,  if  incorporated,  as  provided 
by  the  Pujo  Committee  bill,  be  adequate. 

To  be  effective,  knowledge  of  the  facts  must  be 
actually  brought  home  to  the  investor,  and  this 
can  best  be  done  by  requiring  the  facts  to  be 
stated  in  good,  large  type  in  every  notice,  circu- 
lar, letter  and  advertisement  inviting  the  investor 
to  purchase.  Compliance  with  this  requirement 
should  also  be  obhgatory,  and  not  something 
which  the  investor  could  waive.  For  the  whole 
public  is  interested  in    putting   an   end   to    the 


WHAT  PUBLICITY  CAN  DO        105 

bankers'  exactions.  England  undertook,  years 
ago,  to  protect  its  investors  against  the  wiles  of 
promoters,  by  requiring  a  somewhat  similar  dis- 
closure; but  the  British  act  failed,  in  large 
measure  of  its  purpose,  partly  because  under  it 
the  statement  of  facts  was  filed  only  with  a  public 
official,  and  partly  because  the  investor  could 
waive  the  provision.  And  the  British  statute  has 
now  been  changed  in  the  latter  respect. 

DISCLOSE  SYNDICATE  PARTICULARS 

The  required  publicity  should  also  include  a 
disclosure  of  all  participants  in  an  underwriting. 
It  is  a  common  incident  of  underwriting  that  no 
member  of  the  syndicate  shall  sell  at  less  than  the 
syndicate  price  for  a  definite  period,  unless  the 
syndicate  is  sooner  dissolved.  In  other  words, 
the  bankers  make,  by  agreement,  an  artificial 
price.  Often  the  agreement  is  probably  illegal 
under  the  Sherman  Anti-Trust  Law.  This  price 
maintenance  is,  however,  not  necessarily  objec- 
tionable. It  may  be  entirely  consistent  with  the 
general  welfare,  if  the  facts  are  made  known. 
But  disclosure  should  include  a  list  of  those  par- 
ticipating in  the  underwriting  so  that  the  public 
may  not  be  misled.  The  investor  should  know 
whether  his  adviser  is  disinterested. 


106  OTHER  PEOPLE'S  MONEY 

Not  long  ago  a  member  of  a  leading  banking 
house  was  undertaking  to  justify  a  commission 
taken  by  his  firm  for  floating  a  now  favorite  pre- 
ferred stock  of  a  manufacturing  concern.  The 
bankers  took  for  their  services  $250,000  in  cash, 
besides  one-third  of  the  common  stock,  amount- 
ing to  about  $2,000,000.  "Of  course,"  he  said, 
"that  would  have  been  too  much  if  we  could  have 
kept  it  all  for  ourselves;  but  we  couldn't.  We 
had  to  divide  up  a  large  part.  There  were  fifty- 
seven  participants.  "V\'Tiy,  we  had  even  to  give 
$10,000  of  stock  to (naming  the  presi- 
dent of  a  leading  bank  in  the  city  where  the  busi- 
ness was  located).  He  might  some  day  have 
been  asked  what  he  thought  of  the  stock.  If  he 
had  shrugged  his  shoulders  and  said  he  didn't 
know,  we  might  have  lost  many  a  customer  for 
the  stock.  We  had  to  give  him  $10,000  of  the 
stock  to  teach  him  not  to  shrug  his  shoulders." 

Think  of  the  effectiveness  with  practical  Amer- 
icans of  a  statement  like  this: 

A.  B.  &  Co. 

Investment  Bankers 

We  have  today  secured  substantial  control  of 
the    successful   machinery    business    heretofore 


WHAT  PUBLICITY  CAN  DO        107 

conducted  by  at  ,  Illinois,  which 

has  been  incorporated  under  the  name  of  the 
Excelsior  Manufacturing  Company  with  a  capital 
of  $10,000,000,  of  which  $5,000,000  is  Preferred 
and  $5,000,000  Common. 

As  we  have  a  large  clientele  of  confiding 
customers,  we  were  able  to  secure  from  the 
owners  an  agreement  for  marketing  the  Pre- 
ferred stock — we  to  fix  a  price  which  shall  net 
the  owners  in  cash  $95  a  share. 

We  offer  this  excellent  stock  to  you  at  $100.73 
per  share.  Our  own  commission  or  profit  will 
be  only  a  little  over  $5.00  per  share,  or  say, 
$250,000  cash,  besides  $1,500,000  of  the  Common 
stock,  which  we  received  as  a  bonus.  This  cash 
and  stock  commission  we  are  to  divide  in  various 
proportions  with  the  following  participants  in  the 
underwriting  syndicate: 

C.  D.  &  Co.,  New  York 

E.  F.  &  Co.,  Boston 

L.  M.  &  Co.,  Philadelphia 

I.  K.  &  Co.,  New  York. 

O.  P.  &  Co.,  Chicago 

Were  such  notices  common,  the  investment 
bankers  would  "be  worthy  of  their  hire,"  for 
only  reasonable  compensation  would  ordinarily 
be  taken. 


108         OTHER  PEOPLE'S  MONEY 

For  marketing  the  preferred  stock,  as  in  the 
case  of  Excelsior  ^Manufactui'ing  Co.  referred  to 
above,  investment  bankers  were  doubtless 
essential,  and  as  middlemen  they  performed  a 
useful  service.  But  they  used  their  strong  position 
to  make  an  excessive  charge.  There  are,  how- 
ever, many  cases  where  the  banker's  services 
can  be  altogether  dispensed  with;  and  where 
that  is  possible  he  should  be  eliminated,  not 
only  for  economy's  sake,  but  to  break  up 
financial  concentration. 


CHAPTER  VI 
WHERE  THE  BANKER  IS  SUPERFLUOUS 

The  abolition  of  interlocking  directorates  will 
greatly  curtail  the  bankers'  power  by  putting  an 
end  to  many  improper  combinations.  Publicity 
concerning  bankers'  commissions,  profits  and 
associates,  will  lend  effective  aid,  particularly  by 
curbing  undue  exactions.  Many  of  the  specific 
measures  recommended  by  the  Pujo  Committee 
(some  of  them  dealing  with  technical  details) 
will  go  far  toward  correcting  corporate  and  bank- 
ing abuses;  and  thus  tend  to  arrest  financial 
concentration.  But  the  investment  banker  has, 
within  his  legitimate  province,  acquired  control 
so  extensive  as  to  menace  the  public  welfare, 
even  where  his  business  is  properly  conducted. 
If  the  New  Freedom  is  to  be  attained,  every 
proper  means  of  lessening  that  power  must  be 
availed  of.  A  simple  and  effective  remedy, 
which  can  be  widely  applied,  even  without  new 
legislation,  lies  near  at  hand: — Ehminate  the 
banker-middleman  where  he  is  superfluous. 

Today  practically  all  governments,  states  and 

109 


110         OTHER  PEOPLE'S  MONEY 

municipalities  pay  toll  to  the  banker  on  all 
bonds  sold.  Why  should  they?  It  is  not  be- 
cause the  banker  is  always  needed.  It  is  because 
the  banker  controls  the  only  avenue  through 
which  the  investor  in  bonds  and  stocks  can  or- 
dinarily be  reached.  The  banker  has  become  the 
universal  tax  gatherer.  True,  the  pro  rata 
of  taxes  levied  by  him  upon  our  state  and  city 
governments  is  less  than  that  levied  by  him  upon 
the  corporations.  But  few  states  or  cities  escape 
payment  of  some  such  tax  to  the  banker  on  every 
loan  it  makes.  Even  where  the  new  issues  of 
bonds  are  sold  at  public  auction,  or  to  the  highest 
bidder  on  sealed  proposals,  the  bankers'  syndicates 
usually  secure  large  blocks  of  the  bonds  which 
ai-e  sold  to  the  people  at  a  considerable  profit. 
The  middleman,  even  though  unnecessary,  col- 
lects his  tribute. 

There  is  a  legitimate  field  for  dealers  in  state 
and  municipal  bonds,  as  for  other  merchants. 
Investors  already  owning  such  bonds  must  have 
a  medium  through  which  they  can  sell  their 
holdings.  And  those  states  or  municipalities 
which  lack  an  established  reputation  among 
investors,  or  which  must  seek  more  distant 
markets,  need  the  banker  to  distribute  new  issues. 
But  there  are  many  states  and  cities  which  have 


SUPERFLUOUS  BANKERS  111 

an  established  reputation  and  have  a  home 
market  at  hand.  These  should  sell  their  bonds 
direct  to  investors  without  the  intervention  of  a 
middleman.  And  as  like  conditions  prevail  with 
some  corporations,  their  bonds  and  stocks  should 
also  be  sold  direct  to  the  investor.  Both  financial 
efficiency  and  industrial  liberty  demand  that  the 
bankers'  toll  be  abolished,  where  that  is  possible. 

BANKER   AND  BROKER 

The  business  of  the  investment  banker  must 
not  be  confused  with  that  of  the  bond  and  stock 
broker.  The  two  are  often  combined;  but  the 
functions  are  essentially  different.  The  broker 
performs  a  very  limited  service.  He  has  properly 
nothing  to  do  with  the  original  issue  of  securities, 
nor  with  their  introduction  into  the  market.  He 
merely  negotiates  a  purchase  or  sale  as  agent  for 
another  under  specific  orders.  He  exercises  no 
discretion,  except  in  the  method  of  bringing 
buyer  and  seller  together,  or  of  executing  orders. 
For  his  humble  service  he  receives  a  moderate 
compensation,  a  commission,  usually  one-eighth 
of  one  per  cent.  (12  1/2  cents  for  each  $100)  on 
the  par  value  of  the  security  sold.  The  invest- 
ment banker  also  is  a  mere  middleman.  But  he 
is  a  principal,  not  an  agent.    He  is  also  a  merchant 


112         OTHER  PEOPLE'S  MONEY 

in  bonds  and  stocks.  The  compensation  received 
for  his  part  in  the  transaction  is  in  many  cases 
more  accurately  described  as  profit  than  as  com- 
mission. So  far  as  concerns  new  issues  of 
government,  state  and  municipal  bonds,  espe- 
ciall}',  he  acts  as  merchant,  buying  and  selling 
securities  on  his  own  behalf;  buying  commonly 
at  wholesale  from  the  maker  and  selling  at  retail 
to  the  investors;  taking  the  merchant's  risk  and 
the  merchant's  profits.  On  purchases  of  corpo- 
rate securities  the  profits  are  often  very  large; 
but  even  a  large  profit  may  be  entirely  proper; 
for  when  the  banker's  services  are  needed  and 
are  properl}^  performed,  they  are  of  great  value. 
On  purchases  of  government,  state  and  munic- 
ipal securities  the  profit  is  usually  smaller;  but 
even  a  very  small  profit  cannot  be  justified,  if 
unnecessary. 

HOW  THE  BANKER  CAN  SERVE 

The  banker's  services  include  three  distinct 
functions,  and  only  three: 

First:  Specifically  as  expert.  The  investment 
banker  has  tlie  responsibility  of  the  ordinary 
retailer  to  sell  only  that  merchandise  which  is 
good  of  its  kind.  But  his  responsibility  in  this 
respect  is  unusually  heavy,  because  he  deals  in  an 


SUPERFLUOUS  BANKERS  113 

article  on  which  a  great  majority  of  his  customers 
are  unable,  themselves,  to  pass  intelligent  judg- 
ment without  aid.  The  purchase  by  the  investor 
of  most  corporate  securities  is  little  better  than  a 
gamble,  where  he  fails  to  get  the  advice  of  some 
one  who  has  investigated  the  security  thoroughly 
as  the  banker  should.  For  few  investors  have  the 
time,  the  facilities,  or  the  ability  to  investigate 
properly  the  value  of  corporate  securities. 

Second:  Specifically  as  distributor.  The  banker 
performs  an  all-important  service  in  providing 
an  outlet  for  securities.  His  connections  enable 
him  to  reach  possible  buyers  quickly.  And  good- 
will— that  is,  possession  of  the  confidence  of  regu- 
lar customers — enables  him  to  effect  sales  where 
the  maker  of  the  security  might  utterly  fail  to 
find  a  market. 

Third:  Specifically  as  jobber  or  retailer.  The 
investment  banker,  like  other  merchants,  carries 
his  stock  in  trade  until  it  can  be  marketed.  In 
this  he  performs  a  service  which  is  often  of  great 
value  to  the  maker.  Needed  cash  is  obtained 
immediately,  because  the  whole  issue  of  securities 
can  thus  be  disposed  of  by  a  single  transaction. 
And  even  where  there  is  not  immediate  payment, 
the  knowledge  that  the  money  will  be  provided 
when  needed  is  often  of  paramount  importance. 


114  OTHER  PEOPLE'S  MONEY 

By  carrying  securities  in  stock,  the  banker  per- 
forms a  service  also  to  investors,  who  are  thereby 
enabled  to  buy  securities  at  such  times  as  they 
desire. 

Whenever  makers  of  securities  or  investors 
require  all  or  any  of  these  three  services,  the 
investment  banker  is  needed,  and  payment  of 
compensation  to  him  is  proper.  Where  there  is 
no  such  need,  the  banker  is  cleai'ly  superfluous. 
And  in  respect  to  the  original  issue  of  many  of  our 
state  and  municipal  bonds,  and  of  some  corporate 
securities,  no  such  need  exists. 

WHERE  THE  BANKER  SERVES  NOT 

It  needs  no  banker  experts  in  value  to  tell  us 
that  bonds  of  Massachusetts  or  New  York,  of 
Boston,  Philadelphia  or  Baltimore  and  of  scores 
of  lesser  American  cities,  are  safe  investments. 
The  basic  financial  facts  in  regard  to  such  bonds 
are  a  part  of  the  common  knowledge  of  many 
American  investors;  and,  certainly,  of  most  pos- 
sible investors  who  reside  in  the  particular  state 
or  city  whose  bonds  arc  in  question.  Where  the 
financial  facts  are  not  generally  known,  they  are 
so  simple,  that  they  can  be  easily  summarized  and 
understood  by  any  prospective  investor  without 
interpretation    by    an    expert.     Bankers    often 


SUPERFLUOUS  BANKERS  115 

employ,  before  purchasing  securities,  their  own 
accountants  to  verify  the  statements  supplied  by 
the  makers  of  the  security,  and  use  these  account- 
ants' certificates  as  an  aid  in  selling.  States  and 
municipalities,  the  makers  of  the  securities, 
might  for  the  same  purpose  employ  independent 
public  accountants  of  high  reputation,  who  would 
give  their  certificates  for  use  in  marketing  the 
securities.  Investors  could  also  be  assured  with- 
out banker-aid  that  the  basic  legal  conditions  are 
sound.  Bankers,  before  purchasing  an  issue  of 
securities,  customarily  obtain  from  their  own 
counsel  an  opinion  as  to  its  legality,  which  inves- 
tors are  invited  to  examine.  It  would  answer 
the  same  purpose,  if  states  and  municipalities 
should  supplement  the  opinion  of  their  legal 
representatives  by  that  of  independent  counsel 
of  recognized  professional  standing,  who  would 
certify  to  the  legality  of  the  issue. 

Neither  should  an  investment  banker  be  needed 
to  find  investors  walling  to  take  up,  in  small  lots, 
a  new  issue  of  bonds  of  New  York  or  Massa- 
chusetts, of  Boston,  Philadelphia  or  Baltimore,  or 
a  hundred  other  American  cities.  A  state  or 
municipality  seeking  to  market  direct  to  the 
investor  its  own  bonds  would  naturally  experi- 
ence, at  the  outset,  some  difficulty  in  marketing  a 


116         OTHER  PEOPLE'S  MONEY 

large  issue.  And  in  a  newer  communitj^,  where 
there  is  little  accumulation  of  unemployed  capital, 
it  might  be  impossible  to  find  buyers  for  any  large 
issue.  Investors  are  apt  to  be  conservative; 
and  they  have  been  trained  to  regard  the  inter- 
vention of  the  banker  as  necessary.  The  bankers 
would  naturally  discoiu-age  any  attempt  of  states 
and  cities  to  dispense  with  their  services.  En- 
trance upon  a  market,  hitherto  monopolized  by 
them,  would  usually  have  to  be  struggled  for. 
But  banker-fed  investors,  as  well  as  others  could, 
in  time,  be  brought  to  reahze  the  advantage  of 
avoiding  the  middleman  and  deahng  dii'ectly  with 
responsible  borrowers.  Governments,  like  private 
concerns,  would  have  to  do  educational  work;  but 
this  publicity  would  be  much  less  expensive  and 
much  more  productive  than  that  undertaken  by 
the  bankers.  Many  investors  are  already  impa- 
tient of  banker  exactions;  and  eager  to  deal 
directly  with  governmental  agencies  in  whom  they 
have  more  confidence.  And  a  great  demand  could, 
at  once,  be  developed  among  smaller  investors 
whom  the  bankers  have  been  unable  to  interest, 
and  who  now  never  buy  state  or  municipal  bonds. 
The  opening  of  this  new  field  would  fut-nish  a  mar- 
ket, in  some  respects  more  desirable  and  certainly 
wider  tluui  th:i(  now  reached  by  the  bankers. 


SUPERFLUOUS  BANKERS  117 

Neither  do  states  or  cities  ordinarily  need  the 
services  of  the  investment  banker  to  carry  their 
bonds  pending  distribution  to  the  investor. 
Where  there  is  immediate  need  for  large  funds, 
states  and  cities — at  least  the  older  communities 
— should  be  able  to  raise  the  money  temporarily, 
quite  as  well  as  the  bankers  do  now,  while  await- 
ing distribution  of  their  bonds  to  the  investor. 
Bankers  carry  the  bonds  with  other  people's 
money,  not  with  their  own.  Why  should  not 
cities  get  the  temporary  use  of  other  people's 
money  as  well?  Bankers  have  the  preferential 
use  of  the  deposits  in  the  banks,  often  because 
they  control  the  banks.  Free  these  institutions 
from  banker-control,  and  no  applicant  to  borrow 
the  people's  money  will  be  received  with  greater 
favor  than  our  large  cities.  Boston,  with  its 
$1,500,000,000  of  assessed  valuation  and  $78,033,- 
128  net  debt,  is  certainly  as  good  a  risk  as  even 
Lee,  Higginson  &  Co.  or  Kidder,  Peabody  &  Co. 

But  ordinarily  cities  do  not,  or  should  not, 
require  large  sums  of  money  at  any  one  time. 
Such  need  of  large  sums  does  not  arise  except 
from  time  to  time  where  maturing  loans  are  to  be 
met,  or  when  some  existing  public  utility  plant 
is  to  be  taken  over  from  private  owners.  Large 
issues  of  bonds  for  any  other  purpose  are  usually 


118  OTHER  PEOPLE'S  MONEY 

made  in  anticipation  of  future  needs,  rather  than 
to  meet  present  necessities.  Modern  efficient 
public  financiering,  through  substituting  serial 
bonds  for  the  long  term  issues  (which  in  Massa- 
chusetts has  been  made  obligatory)  will,  in  time, 
remove  the  need  of  large  sums  at  one  time  for 
paying  maturing  debts,  since  each  year's  maturi- 
ties will  be  paid  from  the  year's  taxes.  Purchases 
of  existing  public  utiUty  plants  are  of  rare  occur- 
rence, and  are  apt  to  be  preceded  by  long  periods 
of  negotiation.  When  they  occur  they  can,  if 
foresight  be  exercised,  usually  be  financed  without 
full  cash  paj^ment  at  one  time. 

Today,  when  a  large  issue  of  bonds  is  made,  the 
banker,  while  ostensibly  paying  his  own  money  to 
the  city,  actually  pays  to  the  city  other  people's 
money  which  he  has  borrowed  from  the  banks. 
Then  the  banks  get  back,  through  the  city's  de- 
posits, a  large  part  of  the  money  so  received.  And 
when  the  money  is  returned  to  the  bank,  the 
banker  has  the  opportunity  of  borrowing  it  again 
for  other  operations.  The  process  results  in 
double  loss  to  the  city.  The  city  loses  by  not 
getting  from  the  banks  as  much  for  its  bonds  as 
investors  would  pay.  And  then  it  loses  interest 
on  the  money  raised  before  it  is  needed.  For  the 
bankers  receive  from  the  city  bonds  bearing  rarely 


SUPERFLUOUS  BANKERS  119 

less  than  4  per  cent,  interest;  while  the  proceeds 
are  deposited  in  the  banks  which  rarely  allow 
more  than  2  per  cent,  interest  on  the  daily 
balances. 

CITIES  THAT  HELPED  THEMSELVES 

In  the  present  year  some  cities  have  been  led  by 
necessity  to  help  themselves.  The  bond  market 
was  poor.  Business  was  uncertain,  money  tight 
and  the  ordinary  investor  reluctant.  Bankers 
were  loth  to  take  new  bond  issues.  Municipali- 
ties were  unwilling  to  pay  the  high  rates  de- 
manded of  them.  And  many  cities  were  prohib- 
ited by  law  or  ordinance  from  paying  more  than 
4  per  cent,  interest;  while  good  municipal  bonds 
were  then  selling  on  a  4  1/2  to  5  per  cent,  basis. 
But  money  had  to  be  raised,  and  the  attempt  was 
made  to  borrow  it  direct  from  the  lenders  instead 
of  from  the  banker-middleman.  Among  the 
cities  which  raised  money  in  this  way  were  Phila- 
delphia, Baltimore,  St.  Paul,  and  Utica,  New 
York. 

Philadelphia,  under  Mayor  Blankenburg's 
inspiration,  sold  nearly  $4,175,000  in  about  two 
days  on  a  4  per  cent,  basis  and  another  ''over-the- 
counter"  sale  has  been  made  since.  In  Balti- 
more, with  the  assistance  of  the  Sun-  $4,766,000 


120         OTHER  PEOPLE'S  MONEY 

were  sold  ''over  the  counter"  on  a  4  1/2  per  cent, 
basis.  Utica's  two  ''popular  sales"  of  4  1/2 
per  cent,  bonds  were  largely  "over-subscribed." 
And  since  then  other  cities  large  and  small 
have  had  their  "over-the-counter"  bond  sales. 
The  experience  of  Utica,  as  stated  by  its  Control- 
ler, Fred  G.  Reusswig,  must  prove  of  general 
interest : 

"In  June  of  the  present  year  I  advertised  for 
sale  two  issues,  one  of  S  100,000,  and  the  other  of 
$19,000,  bearing  interest  at  4  1/2  per  cent.  The 
latter  issue  was  purchased  at  par  by  a  local  bidder 
and  of  the  former  we  purchased  $10,000  for  our 
sinking  funds.  That  left  $90,000  unsold,  for 
which  there  were  no  bidders,  which  was  the  first 
time  that  I  had  been  unable  to  sell  our  bonds. 
About  this  time  the  'popular  sales'  of  Baltimore 
and  Philadelphia  attracted  my  attention.  The 
laws  in  effect  in  those  cities  did  not  restrict  the 
officials  as  does  our  law  and  I  could  not  copy  their 
methods.  I  realized  that  there  was  plenty  of 
money  in  this  immediate  vicinity  and  if  I  could 
devise  a  plan  conforming  with  our  laws  under 
which  I  could  inake  the  sale  attractive  to  small 
investors  it  would  undoubtedly  prove  successful. 
I  had  found,  in  previous  efforts  to  interest  people 
of  small  means,  that  they  did  not  understand  the 


SUPERFLUOUS  BANKERS  121 

meaning  of  premium  and  would  rather  not  buy 
than  bid  above  par.  They  also  objected  to  mak- 
ing a  deposit  with  their  bids.  In  arranging  for 
the  'popular  sales'  I  announced  in  the  papers 
that,  while  I  must  award  to  the  highest  bidder,  it 
was  my  opinion  that  a  par  bid  would  be  the  highest 
bid.  I  also  announced  that  we  would  issue  bonds 
in  denominations  as  low  as  $100  and  that  we 
would  not  require  a  deposit  except  where  the  bid 
was  $5,000  or  over.  Then  I  succeeded  in  getting 
the  local  papers  to  print  editorials  and  local 
notices  upon  the  subject  of  municipal  bonds,  with 
particular  reference  to  those  of  Utica  and  the 
forthcoming  sale.  All  the  prospective  purchaser 
had  to  do  was  to  fill  in  the  amount  desired, 
sign  his  name,  seal  the  bid  and  await  the  day 
for  the  award.  I  did  not  have  many  bidders  for 
very  small  amounts.  There  was  only  one  for 
$100  at  the  first  sale  and  one  for  $100  at  the 
second  sale  and  not  more  than  ten  who  wanted 
less  than  $500.  Most  of  the  bidders  were  looking 
for  from  $1,000  to  $5,000,  but  nearly  all  were  peo- 
ple of  comparatively  small  means,  and  with  some 
the  investment  represented  all  their  savings.  In 
awarding  the  bonds  I  gave  preference  to  residents 
of  Utica  and  I  had  no  difficulty  in  apportioning 
the  various  maturities  in  a  satisfactory  way. 


122  OTHER  PEOPLE'S  MONEY 

"I  believe  that  there  are  a  large  number  of  per- 
sons in  every  cit}^  who  would  buy  their  own  bonds 
if  the  way  w^ere  made  easier  by  law.  Syracuse 
and  the  neighboring  village  of  Ilion,  both  of  which 
had  been  unable  to  sell  in  the  usual  way,  came  to 
me  for  a  program  of  procedure  and  both  have 
since  had  successful  sales  along  similar  lines. 
We  have  been  able  by  this  means  to  keep  the 
interest  rate  on  our  bonds  at  4  1/2  per  cent.,  while 
cities  which  have  followed  the  old  plan  of  relying 
upon  bond  houses  have  had  to  increase  the  rate 
to  5  per  cent.  I  am  in  favor  of  amending  the  law 
in  such  a  manner  that  the  Common  Council, 
approved  by  the  Board  of  Estimate  and  Appor- 
tionment, may  fix  the  prices  at  which  bonds  shall 
be  sold,  instead  of  calling  for  competitive  bids. 
Then  place  the  bonds  on  sale  at  the  Controller's 
office  to  any  one  who  will  pay  the  price.  The 
prices  upon  each  issue  should  be  graded  according 
to  the  different  values  of  different  maturities. 
Under  the  present  law,  as  we  have  it,  conditions 
are  too  complicated  to  make  a  sale  practicable 
except  upon  a  basis  of  par  bids." 

THE  ST.  PAUL  EXPERIMENT 

St.  Paul  wisely  introduced  into  its  experiment  a 
more  democratic  feature,  which  Tom  L.  Johnson, 


SUPERFLUOUS  BANKERS  123 

Cleveland's  great  mayor,  thought  out  (but  did  not 
utilize),  and  which  his  friend  W.  B.  Colver,  now 
Editor-in-Chief  of  the  Daily  News,  brought  to  the 
attention  of  the  St.  Paul  officials.  Mayor  John- 
son had  recognized  the  importance  of  reaching  the 
small  savings  of  the  people;  and  concluded  that 
it  was  necessary  not  only  to  issue  the  bonds  in 
very  small  denominations,  but  also  to  make  them 
redeemable  at  par.  He  sought  to  combine 
practically,  bond  investment  with  the  savings 
bank  privilege.  The  fact  that  municipal  bonds 
are  issuable  ordinarily  only  in  large  denomina- 
tions, say,  $1,000,  presented  an  obstacle  to  be 
overcome.  Mayor  Johnson's  plan  was  to  have 
the  sinking  fund  commissioners  take  large  blocks 
of  the  bonds,  issue  against  them  certificates  in 
denominations  of  $10,  and  have  the  commis- 
sioners agree  (under  their  power  to  purchase 
securities)  to  buy  the  certificates  back  at  par  and 
interest.  Savings  bank  experience,  he  insisted, 
showed  that  the  redemption  feature  would  not 
prove  an  embarrassment;  as  the  percentage  of 
those  wishing  to  withdraw  their  money  is  small; 
and  deposits  are  nearly  always  far  in  excess  of 
withdrawals. 

The  St.  Paul  sinking  fund  commissioners  and 
City   Attorney   O'Neill   approved   the   Johnson 


124  OTHER  PEOPLE'S  MONEY 

plan;  and  in  the  face  of  high  money  rates,  sold  on 
a  4  per  cent,  basis,  during  July,  certificates  to  the 
net  amount  of  $502,300;  during  August,  $147,- 
000;  and  during  September,  over  $150,000,  the 
average  net  sales  being  about  $5,700  a  day. 
Mr.  Colver,  reporting  on  the  St.  Paul  experience, 
said: 

''There  have  been  about  2,000  individual  pur- 
chasers making  the  average  deposit  about  $350 
or  $3G0.  There  have  been  no  certificates  sold 
to  banks.  During  the  first  month  the  deposits 
averaged  considerably  higher  and  for  this  reason : 
in  very  many  cases  people  who  had  savings  which 
represented  the  accumulation  of  considerable 
time,  withdrew  their  money  from  the  postal  sav- 
ings banks,  from  the  regular  banks,  from  various 
hiding  places  and  deposited  them  with  the  city. 
Now  these  same  people  are  coming  once  or  twice 
a  month  and  making  deposits  of  ten  or  twenty 
dollars,  so  that  the  average  of  the  individual 
deposit  has  fallen  very  rapidly  during  September 
and  every  indication  is  that  the  number  of  small 
deposits  will  continue  to  increase  and  the  rela- 
tively large  deposits  become  less  frequent  as 
time  goes  on. 

As  a  matter  of  fact,  these  certificate  deposits 
are  stable,  far  more  than  the  deposits  and  invest- 


SUPERFLUOUS  BANKERS  125 

ments  of  richer  people  who  watch  for  advanta- 
geous reinvestments  and  who  shift  their  money 
about  rather  freely.  The  man  with  three  or 
four  hundred  dollars  savings  will  suffer  almost 
anything  before  he  will  disturb  that  fund.  We 
believe  that  the  deposits  every  day  here,  day  in 
and  day  out,  will  continue  to  take  care  of  all  the 
withdrawals  and  still  leave  a  net  gain  for  the  day, 
that  net  figure  at  present  being  about  $5,700  a 
day." 

Many  cities  are  now  prevented  from  selling 
bonds  direct  to  the  small  investors,  through  laws 
which  compel  bonds  to  be  issued  in  large  denomi- 
nations or  which  require  the  issue  to  be  offered 
to  the  highest  bidder.  These  legislative  limita- 
tions should  be  promptly  removed. 

SALESMANSHIP   AND    EDUCATION 

Such  success  as  has  already  been  attained  is 
largely  due  to  the  unpaid  educational  work  of 
leading  progressive  newspapers.  But  the  educa- 
tional work  to  be  done  must  not  be  confined  to 
teaching  "the  people" — the  buyers  of  the  bonds. 
Municipal  officials  and  legislators  have  quite  as 
much  to  learn.  They  must,  first  of  all,  study 
salesmanship.     Selling  bonds  to  the  people  is  a 


126  OTHER  PEOPLE'S  MONEY 

new  art,  still  undeveloped.  The  general  problems 
have  not  yet  been  worked  out.  And  besides 
these  problems  common  to  all  states  and  cities, 
there  will  be,  in  nearly  every  community,  local 
problems  which  must  be  solved,  and  local  difficul- 
ties which  must  be  overcome.  The  proper  solu- 
tion even  of  the  general  problems  must  take  con- 
siderable time.  There  will  have  to  be  many  ex- 
periments made;  and  doubtless  there  will  be  many 
failures.  Every  great  distributor  of  merchandise 
knows  the  obstacles  which  he  had  to  overcome 
before  success  was  attained;  and  the  large  sums 
that  had  to  be  invested  in  opening  and  preparing 
a  market.  Individual  concerns  have  spent  mil- 
lions in  wise  publicity;  and  have  ultimateh'  reaped 
immense  profits  when  the  market  was  won. 
Cities  must  take  their  lessons  from  these  great 
distributors.  Cities  must  be  ready  to  study  the 
problems  and  to  spend  prudently  for  proper  pub- 
licity work.  It  might,  in  the  end,  prove  an  econ- 
omy, even  to  allow,  on  particular  issues,  where  nec- 
essary, a  somewhat  higher  interest  rate  than  bank- 
ers would  exact,  if  tliereby  a  direct  market  for 
bonds  could  be  secured.  Future  operations  would 
yield  large  economics.  And  the  obtaining  of  a 
direct  market  for  city  bonds  is  growing  ever  more 
important,  because  of  the  huge  increase  in  loans 


SUPERFLUOUS  BANKERS  127 

which  must  attend  the  constant  expansion  of 
municipal  functions.  In  1898  the  new  munic- 
ipal issues  aggregated  $103,084,793;  in  1912, 
$380,810,287. 

SAVINGS  BANKS  AS  CUSTOIMERS 

In  New  York,  Massachusetts  and  the  other 
sixteen  states  where  a  system  of  purely  mutual 
savings  banks  is  general,  it  is  possible,  with  a 
little  organization,  to  develop  an  important  mar- 
ket for  the  direct  purchaser  of  bonds.  The 
bonds  issued  by  Massachusetts  cities  and  towns 
have  averaged  recently  about  $15,000,000  a  year, 
and  those  of  the  state  about  $3,000,000.  The  194 
Massachusetts  savings  banks,  with  aggregate 
assets  of  $902,105,755.94,  held  on  October  31, 
1912,  $90,536,581.32  in  bonds  and  notes  of  states 
and  municipalities.  Of  this  sum  about  $60,000,- 
000  are  invested  in  bonds  and  notes  of  Massa- 
chusetts cities  and  towns,  and  about  $8,000,000  in 
state  issues.  The  deposits  in  the  savings  banks 
are  increasing  at  the  rate  of  over  $30,000,000  a 
year.  Massachusetts  state  and  municipal  bonds 
have,  within  a  few  years,  come  to  be  issued  tax 
exempt  in  the  hands  of  the  holder,  whereas  other 
classes  of  bonds  usually  held  by  savings  banks 
are  subject  to  a  tax  of  one-half  of  one  per  cent. 


128         OTHER  PEOPLE'S  MONEY 

of  the  market  value.  Massachusetts  savings 
banks,  therefore,  will  to  an  increasing  extent,  se- 
lect ^Massachusetts  municipal  issues  for  high-grade 
bond  investments.  Certainly  Massachusetts  cit- 
ies and  towns  might,  with  the  cooperation  of  the 
Commonwealth,  easily  develop  a  "home  market" 
for  "over-the-counter"  bond  business  with  the 
savings  banks.  And  the  savings  banks  of  other 
states  offer  similar  opportunities  to  their  munici- 
palities. 

COOPERATION 

Bankers  obtained  their  power  through  com- 
bination. Why  should  not  cities  and  states 
by  means  of  cooperation  free  themselves  from 
the  bankers?  For  by  cooperation  between  the 
cities  and  the  state,  the  direct  marketing  of 
municipal  bonds  could  be  greatly  facilitated. 

Massachusetts  has  33  cities,  each  with  a  popu- 
lation of  over  12,000  persons;  71  towns  each 
with  a  population  of  over  5,000;  and  250  towns 
each  with  a  population  of  less  than  5,000.  Three 
hundred  and  eight  of  these  municipalities  now 
have  funded  indebtedness  outstanding.  The 
aggregate  net  indebtedness  is  about  $180,000,000. 
Every  year  about  $15,000,000  of  bonds  and  notes 
are  issued  by  the  Massachusetts  cities  and  towna 


SUPERFLUOUS  BANKERS  129 

for  the  purpose  of  meeting  new  requirements  and 
refunding  old  indebtedness.  If  these  munici- 
palities would  cooperate  in  marketing  securities, 
the  market  for  the  bonds  of  each  municipality- 
would  be  widened;  and  there  would  exist  also  a 
common  market  for  Massachusetts  municipal 
securities  which  would  be  usually  well  supplied, 
would  receive  proper  publicity  and  would  attract 
investors.  Successful  merchandising  ob\dously 
involves  carrying  an  adequate,  well-assorted 
stock.  If  every  city  acts  alone,  in  endeavoring 
to  market  its  bonds  direct,  the  city's  bond-selling 
activity  will  necessarily  be  sporadic.  Its  ability 
to  supply  the  investor  will  be  limited  by  its  own 
necessities  for  money.  The  market  will  also  be 
limited  to  the  bonds  of  the  particular  municipal- 
ity. But  if  a  state  and  its  cities  should  cooperate, 
there  could  be  developed  a  continuous  and  broad 
market  for  the  sale  of  bonds  ''over-the-counter." 
The  joint  selling  agency  of  over  three  hundred 
municipalities, — as  in  Massachusetts— would  natu- 
rally have  a  constant  supply  of  assorted  bonds 
and  notes  which  could  be  had  in  as  small  amounts 
as  the  investor  might  want  to  buy  them.  It 
would  be  a  simple  matter  to  establish  such  a 
joint   selUng   agency   by   which   municipalities, 


130  OTHER  PEOPLE'S  MONEY 

under  proper  regulation  of,  and  aid  from  the 
state,  would  cooperate. 

And  cooperation  among  the  cities  and  with  the 
state  might  serve  in  another  important  respect. 
These  354  Massachusetts  municipalities  carry  in 
the  aggregate  large  bank  balances.  Sometimes 
the  balance  carried  by  a  city  represents  unex- 
pended revenues;  sometimes  unexpended  pro- 
ceeds of  loans.  On  these  balances  they  usually 
receive  from  the  banks  2  per  cent,  interest.  The 
balances  of  municipalities  vary  like  those  of  other 
depositors;  one  having  idle  funds,  when  another 
is  in  need.  Why  should  not  all  of  these  cities 
and  towns  cooperate,  making,  say,  the  State  their 
common  banker,  and  supply  each  other  with 
funds  as  farmers  and  laborers  cooperate  tlirough 
credit  unions?  Then  cities  would  get,  instead  of 
2  per  cent,  on  their  balances,  all  their  money 
was  worth. 

The  Commonwealth  of  jMassachusetts  holds 
now  in  its  sinking  and  other  funds  nearly  S30,000- 
000  of  Massachusetts  municipal  securities,  con- 
stituting nearly  tliree-fourths  of  all  securities  held 
in  these  funds.  Its  annual  purchases  aggregate 
nearly  $4,000,000.  Its  purchases  direct  from 
cities  and  towns  have  already  exceeded  $1,000,000 
this  year.     It  would  1)0  but  a  sinii)Io  extension  of 


SUPERFLUOUS  BANKERS  131 

the  state's  function  to  cooperate,  as  indicated,  in 
a  joint,  Municipal  Bond  Selling  Agency  an  dCredit 
Union.  It  would  be  a  distinct  advance  in  the 
efficiency  of  state  and  municipal  financing; 
and  what  is  even  more  important,  a  long  step 
toward  the  emancipation  of  the  people  from 
banker-control. 

CORPORATE    SELF-HELP 

Strong  corporations  with  established  reputa- 
tions, locally  or  nationally,  could  emancipate 
themselves  from  the  banker  in  a  similar  manner. 
Public-service  corporations  in  some  of  our  leading 
cities  could  easily  establish  ''over-the-counter" 
home  markets  for  their  bonds;  and  would  be 
greatly  aided  in  this  by  the  supervision  now  being 
exercised  by  some  state  commissions  over  the 
issue  of  securities  by  such  corporations.  Such 
corporations  would  gain  thereby  not  only  in 
freedom  from  banker-control  and  exactions,  but 
in  the  winning  of  valuable  local  support.  The 
investor's  money  would  be  followed  by  his  sym- 
pathy. In  things  economic,  as  well  as  in  things 
political,  wisdom  and  safety  lie  in  direct  appeals  to 
the  people. 

The  Pennsylvania  Raiboad  now  relies  largely 
upon  its  stockholders  for  new  capital.     But  a 


132         OTHER  PEOPLE'S  MONEY 

corporation  with  its  long-continued  success  and 
reputation  for  stability  should  have  much  wider 
financial  support  and  should  eliminate  the  banker 
altogether.  With  the  2,700  stations  on  its 
system,  the  Pennsylvania  could,  with  a  slight 
expense,  create  nearly  as  many  avenues  through 
which  money  would  be  obtainable  to  meet  its 
growing  needs. 

BANKER  PROTECTORS 

It  may  be  urged  that  reputations  often  outlive 
the  conditions  which  justify  them,  that  outlived 
reputations  are  pitfalls  to  the  investors;  and  that 
the  investment  banker  is  needed  to  guard  him 
from  such  dangers.  True;  but  when  have  the 
big  bankers  or  (their  little  satellites  protected  the 
people  from  such  pitfalls? 

Was  there  ever  a  more  be-bankered  railroad 
than  the  New  Haven?  Was  there  ever  a  more 
banker-led  community  of  investors  than  New 
England?  Six  years  before  the  fall  of  that  great 
system,  the  hidden  dangers  were  pointed  out  to 
these  banker-experts.  Proof  was  furnished  of 
the  rotting  timbers.  The  disaster-breeding  poli- 
cies were  laid  bare.  The  bankers  took  no  action. 
Repeatedly,  thereafter,  the  bankers'  attention 
was   called   to   the  steady   deterioration   of   the 


SUPERFLUOUS  BANKERS  133 

structure.  The  New  Haven  books  disclose  11,- 
481  stockholders  who  are  residents  of  Massa- 
chusetts; 5,682  stockholders  in  Connecticut;  735 
in  Rhode  Island;  and  3,510  in  New  York.  Of 
the  New  Haven  stockholders  10,474  were  women. 
Of  the  New  Haven  stockholders  10,222  were  of 
such  modest  means  that  their  holdings  were  from 
one  to  ten  shares  only.  The  investors  were 
sorely  in  need  of  protection.  The  city  directories 
disclose  146  banking  houses  in  Boston,  26  in 
Providence,  33  in  New  Haven  and  Hartford, 
and  357  in  New  York  City.  But  who,  connected 
with  those  New  England  and  New  York  bank- 
ing houses,  during  the  long  years  which  pre- 
ceded the  recent  investigation  of  the  Interstate 
Commerce  Commission,  raised  either  voice  or 
pen  in  protest  against  the  continuous  mismanage- 
ment of  that  great  trust  property  or  warned  the 
public  of  the  impending  disaster?  Some  of  the 
bankers  sold  their  own  stock  holdings.  Some 
bankers  whispered  to  a  few  favored  customers 
advice  to  dispose  of  New  Haven  stock.  But  not 
one  banker  joined  those  who  sought  to  open  the 
eyes  of  New  England  to  the  impending  disaster 
and  to  avert  it  by  timely  measures.  New 
England's  leading  banking  houses  were  ready  to 
"cooperate"  with  the  New  Haven  management 


134         OTHER  PEOPLE'S  MONEY 

in  taking  generous  commissions  for  marketing  the 
endless  supply  of  new  securities;  but  they  did 
nothing  to  protect  the  investors.  Were  these 
bankers  blind?  Or  were  they  afraid  to  oppose 
the  will  of  J.  P.  Morgan  &  Co.? 

Perhaps  it  is    the  banker    who,   most   of    all, 
needs  the  New  Freedom. 


CHAPTER  VII 
BIG  MEN  AND  LITTLE  BUSINESS 

J.  P.  Morgan  &  Co.  declare,  in  their  letter  to 
the  Pujo  Committee,  that  ''practically  all  the 
railroad  and  industrial  development  of  this  coun- 
try has  taken  place  initially  through  the  medium 
of  the  great  banking  houses."  That  statement  is 
entirely  unfounded  in  fact.  On  the  contrary 
nearly  every  such  contribution  to  our  comfort  and 
prosperity  was  "initiated"  without  their  aid. 
The  ''great  banking  houses"  came  into  relation 
with  these  enterprises,  either  after  success  had 
been  attained,  or  upon  "reorganization"  after 
the  possibility  of  success  had  been  demonstrated, 
but  the  funds  of  the  hardy  pioneers,  who  had 
risked  their  all,  were  exhausted. 

This  is  true  of  our  early  railroads,  of  our 
early  street  railways,  and  of  the  automobile;  of 
the  telegraph,  the  telephone  and  the  wireless; 
of  gas  and  oil;  of  harvesting  machinery,  and  of 
our  steel  industry;  of  the  textile,  paper  and  shoe 
industries;  and  of  nearly  every  other  important 
branch  of  manufacture.     The  initiation  of  each 

13« 


136  OTHER  PEOPLE'S  MONEY 

of  these  enterprises  may  properly  be  character- 
ized as  "great  transactions";  and  the  men  who 
contributed  the  financial  aid  and  business  man- 
agement necessary  for  their  introduction  are 
entitled  to  share,  equally  with  inventors,  in  our 
gratitude  for  what  has  been  accomplished.  But 
the  instances  are  extremely  rare  where  the  origi- 
nal financing  of  such  enterprises  was  undertaken 
by  investment  bankers,  great  or  small.  It  was 
usually  done  by  some  common  business  man, 
accustomed  to  taking  risks;  or  by  some  well-to- 
do  friend  of  the  inventor  or  pioneer,  who  was 
influenced  largely  by  considerations  other  than 
money-getting.  Here  and  there  you  will  find 
that  banker-aid  was  given;  but  usually  in  those 
cases  it  was  a  small  local  banking  concern,  not 
a  "great  banking  house"  which  helped  to  "initi- 
ate" the  undertaking. 

RAILROADS 

We  have  come  to  associate  the  great  bankers 
with  railroads.  But  their  part  was  not  conspicu- 
ous in  the  early  history  of  the  Eastern  railroads; 
and  in  the  ^liddle  West  the  experience  was,  to 
some  extent,  similar.  The  Boston  &  Maine 
Railroad  owns  and  leases  2,215  miles  of  line;  but 
it  is  a  composite  of  about  ICG  separate  railroad 


BIG  MEN  AND  LITTLE  BUSINESS    137 

companies.  The  New  Haven  Railroad  owns 
and  leases  1,996  miles  of  line;  but  it  is  a  compos- 
ite of  112  separate  railroad  companies.  The 
necessary  capital  to  build  these  little  roads  was 
gathered  together,  partly  through  state,  county 
or  municipal  aid;  partly  from  business  men  or 
landholders  who  sought  to  advance  their  special 
interests;  partly  from  investors;  and  partly  from 
well-to-do  public-spirited  men,  who  wished  to 
promote  the  welfare  of  their  particular  communi- 
ties. About  seventy-five  years  after  the  first  of 
these  railroads  was  built,  J.  P.  Morgan  &  Co. 
became  fiscal  agent  for  all  of  them  by  creating  the 
New  Haven-Boston  &  Maine  monopoly. 

STEAMSHIPS 

The  history  of  our  steamship  lines  is  similar. 
In  1807,  Robert  Fulton,  with  the  financial  aid  of 
Robert  R.  Livingston,  a  judge  and  statesman — not 
a  banker — demonstrated  with  the  Claremont, 
that  it  was  practicable  to  propel  boats  by  steam. 
In  1833  the  three  Cunard  brothers  of  Halifax 
and  232  other  persons — stockholders  of  the 
Quebec  and  Halifax  Steam  Navigation  Com- 
pany— joined  in  supplying  about  $80,000  to 
build  the  Royal  William, — the  first  steamer  to 
cross  the  Atlantic.     In  1902,  many  years  after 


138         OTHER  PEOPLE'S  MONEY 

individual  enterprises  had  developed  practically 
all  the  great  ocean  lines,  J.  P.  IMorgan  &  Co. 
floated  the  International  Mercantile  Marine 
with  its  852,744,000  of  4  1/2  bonds,  now  selling 
at  about  60,  and  $100,000,000  of  stock  (pre- 
ferred and  common)  on  which  no  dividend  has 
ever  been  paid.  It  was  just  sixty- two  years  after 
the  first  regular  line  of  transatlantic  steamers — 
The  Cunard — was  founded  that  Mr.  Morgan 
organized  the  Shipping  Trust. 

TELEGRAPH 

The  story  of  the  telegraph  is  similar.  The 
money  for  developing  Morse's  invention  was 
supplied  by  his  partner  and  co-worker,  Alfred 
Vail.  The  initial  line  (from  Washington  to  Balti- 
more) was  built  with  an  appropriation  of  $30,000 
made  by  Congress  in  1843.  Sixty-six  years  later 
J.  P.  Morgan  &  Co.  became  bankers  for 
the  Western  Union  through  financing  its  pur- 
chase by  the  American  Telephone  &  Telegraph 
Company. 

HARVESTING   MACHINERY 

Next  to  railroads  and  steamships,  harvesting 
machinery  has  probably  been  the  most  potent 
factor  in  the  development  of  America;  and  most 


BIG  MEN  AND  LITTLE  BUSINESS  139 

important  of  the  harvesting  machines  was  Cyrus 
H.  McCormick's  reaper.  That  made  it  possible 
to  increase  the  grain  harvest  twenty-  or  thirty- 
fold.  No  investment  banker  had  any  part  in  in- 
troducing this  great  business  man's  invention. 

McCormick  was  without  means;  but  William 
Butler  Ogden,  a  railroad  builder,  ex-Mayor  and 
leading  citizen  of  Chicago,  supplied  $25,000  with 
which  the  first  factory  was  built  there  in  1847. 
Fifty-five  years  later,  J.  P.  Morgan  &  Co.  per- 
formed the  service  of  combining  the  five  great 
harvester  companies,  and  received  a  commission 
of  $3,000,000.  The  concerns  then  consolidated 
as  the  International  Harvester  Company,  with 
a  capital  stock  of  $120,000,000,  had,  despite 
their  huge  assets  and  earning  power,  been  pre- 
viously capitalized,  in  the  aggregate,  at  only 
$10,500,000 — strong  evidence  that  in  all  the 
preceding  years  no  investment  banker  had 
financed  them.  Indeed,  McCormick  was  as  able 
in  business  as  in  mechanical  invention.  Two 
years  after  Odgen  paid  him  $25,000  for  a  half 
interest  in  the  business,  McCormick  bought  it 
back  for  $50,000;  and  thereafter,  until  his  death 
in  1884,  no  one  but  members  of  the  McCormick 
family  had  any  interest  in  the  business. 


140         OTHER  PEOPLE'S  MONEY 

THE   BANKER   ERA 

It  may  be  urged  that  railroads  and  steamships, 
the  telegraph  and  harvesting  machinery  were 
introduced  before  the  accumulation  of  investment 
capital  had  developed  the  investment  banker, 
and  before  America's  "great  banking  houses" 
had  been  established;  and  that,  consequently,  it 
would  be  fairer  to  inquire  what  services  bankers 
had  rendered  in  connection  with  later  industrial 
development.  The  firm  of  J.  P.  Morgan  &  Co. 
is  fifty-five  years  old;  Kuhn,  Loeb  &  Co.  fifty- 
six  years  old;  Lee,  Higginson  &  Co.  over  fifty 
years;  and  Kidder,  Peabody  &  Co.  forty-eight 
years;  and  yet  the  investment  banker  seems  to 
have  had  almost  as  little  part  in  "initiating" 
the  great  improvements  of  the  last  half  century, 
as  did  bankers  in  the  earlier  period. 

STEEL 

The  modern  steel  industry  of  America  is  forty- 
five  years  old.  The  "great  bankers"  had  no  part 
in  initiating  it.  Andrew  Carnegie,  then  already 
a  man  of  large  means,  introduced  the  Bessemer 
process  in  18G8.  In  the  next  thirty  years  our 
steel  and  iron  industry  increased  greatly.  By 
1898    we    had    far   outstripped   all   competitors. 


BIG  MEN  AND  LITTLE  BUSINESS  141 

America's  production  about  equalled  the  aggre- 
gate of  England  and  Germany.  We  had  also 
reduced  costs  so  much  that  Europe  talked  of  the 
"American  Peril."  It  was  1898,  when  J.  P. 
Morgan  &  Co.  took  their  first  step  in  forming  the 
Steel  Trust,  by  organizing  the  Federal  Steel 
Company.  Then  followed  the  combination  of 
the  tube  mills  into  an  $80,000,000  corporation, 
J.  P.  Morgan  &  Co.  taking  for  their  syndicate 
services  $20,000,000  of  common  stock.  About 
the  same  time  the  consolidation  of  the  bridge  and 
structural  works,  the  tin  plate,  the  sheet  steel,  the 
hoop  and  other  mills  followed;  and  finally,  in 
1901,  the  Steel  Trust  was  formed,  with  a  capitali- 
zation of  $1,402,000,000.  These  combinations 
came  thirty  years  after  the  steel  industry  had 
been  "initiated". 

THE   TELEPHONE 

The  telephone  industry  is  less  than  forty  years 
old.  It  is  probably  America's  greatest  contri- 
bution to  industrial  development.  The  bankers 
had  no  part  in  "initiating"  it.  The  glory  belongs 
to  a  simple,  enthusiastic,  warm-hearted,  business 
man  of  Haverhill,  Massachusetts,  who  was  willing 
to  risk  his  own  money.  H.  N.  Casson  tells  of 
this,  most  interestingly,  in  his  "History  of  the 
Telephone": 


142         OTHER  PEOPLE'S  MONEY 

"The  only  man  who  had  monej'  and  dared  to 
stake  it  on  the  future  of  the  telephone  was 
Thomas  Sanders,  and  he  did  this  not  mainly  for 
business  reasons.  Both  he  and  Hubbard  were 
attached  to  Bell  primaril}"  by  sentiment,  as  Bell 
had  removed  the  blight  of  dumbness  from  San- 
ders' little  son,  and  was  soon  to  marry  Hubbard's 
daughter.  Also,  Sanders  had  no  expectation,  at 
first,  that  so  much  money  would  be  needed.  He 
was  not  rich.  His  entire  business,  which  was 
that  of  cutting  out  soles  for  shoe  manufacturers, 
was  not  at  any  time  worth  more  than  thirty- 
five  thousand  dollars.  Yet,  from  1874  to  1878, 
he  had  advanced  nine-tenths  of  the  money  that 
was  spent  on  the  telephone.  The  first  five 
thousand  telephones,  and  more,  were  made  with 
his  money.  And  so  many  long,  expensive  months 
dragged  by  before  any  relief  came  to  Sanders, 
that  he  was  compelled,  much  against  his  will  and 
his  business  judgment,  to  stretch  his  credit 
within  an  inch  of  the  breaking-point  to  help  Bell 
and  the  telephone.  Desperately  he  signed  note 
after  note  until  he  faced  a  total  of  one  hundred 
and  ten  thousand  dollars.  If  the  new  'scientific 
toy'  succeeded,  which  he  often  doubted,  he  would 
be  the  richest  citizen  in  Haverhill;  and  if  it  failed, 
which  he  sorely  feared,  he  would  be  a  bankrupt. 


BIG  MEN  AND  LITTLE  BUSINESS  143 

Sanders  and  Hubbard  were  leasing  telephones  two 
by  two,  to  business  men  who  previously  had  been 
using  the  private  lines  of  the  Western  Union 
Telegraph  Company.  This  great  corporation 
was  at  this  time  their  natural  and  inevitable 
enemy.  It  had  swallowed  most  of  its  competi- 
tors, and  was  reaching  out  to  monopolize  all 
methods  of  communication  by  wire.  The  rosiest 
hope  that  shone  in  front  of  Sanders  and  Hubbard 
was  that  the  Western  Union  might  conclude  to 
buy  the  Bell  patents,  just  as  it  had  already  bought 
many  others.  In  one  moment  of  discourage- 
ment they  had  offered  the  telephone  to  President 
Orton,  of  the  Western  Union,  for  $100,000;  and 
Orton  had  refused  it.  'What  use,'  he  asked 
pleasantly,  '  could  this  company  make  of  an  elec- 
trical toy?' 

"But  besides  the  operation  of  its  own  wires,  the 
Western  Union  was  supplying  customers  with 
various  kinds  of  printing-telegraphs  and  dial- 
telegraphs,  some  of  which  could  transmit  sixty 
words  a  minute.  These  accurate  instruments,  it 
believed,  could  never  be  displaced  by  such  a  scien- 
tific oddity  as  the  telephone,  and  it  continued  to 
believe  this  until  one  of  its  subsidiary  companies 
— the  Gold  and  Stock — reported  that  several  of 
its  machines  had  been  superseded  by  telephones. 


144         OTHER  PEOPLE'S  MONEY 

"At  once  the  Western  Union  awoke  from  its 
indifference.  Even  this  tiny  nibbUng  at  its 
business  must  be  stopped.  It  took  action  quickly, 
and  organized  the  'American  Speaking-Tele- 
phone Company,'  and  with  $300,000  capital,  and 
with  three  electrical  inventors,  Edison,  Gray,  and 
Dolbear,  on  its  staff.  With  all  the  bulk  of  its 
great  wealth  and  prestige,  it  swept  down  upon 
Bell  and  his  little  body-guard.  It  trampled 
upon  Bell's  patent  with  as  Uttle  concern  as  an 
elephant  can  have  when  he  tramples  upon  an 
ant's  nest.  To  the  complete  bewilderment  of 
Bell,  it  coolly  announced  that  it  had  the  only 
original  telephone,  and  that  it  was  ready  to  sup- 
ply superior  telephones  with  all  the  latest 
improvements  made  by  the  original  inventors — 
Dolbear,  Gray,  and  Edison. 

"The  result  was  strange  and  unexpected.  The 
Bell  group,  instead  of  being  driven  from  the  field, 
were  at  once  lifted  to  a  higher  level  in  the  business 
world.  And  the  Western  Union,  in  the  endeavor 
to  protect  its  private  lines,  became  involuntarily 
a  'bell-wether'  to  lead  capitalists  in  the  direction 
of  the  telephone." 

Even  then,  when  financial  aid  came  to  the  Bell 
enterprise,  it  was  from  cai)italists,  not  from  l)ank- 
ers,  and  among  these  capitalists  was  William  II. 


BIG  MEN  AND  LITTLE  BUSINESS  145 

Forbes  (son  of  the  builder  of  the  Burlington)  who 
became  the  first  President  of  the  Bell  Telephone 
Company.  That  was  in  1878.  More  than  twenty 
years  later,  after  the  telephone  had  spread  over 
the  world,  the  great  house  of  Morgan  came 
into  financial  control  of  the  property.  The 
American  Telephone  &  Telegraph  Company  was 
formed.  The  process  of  combination  became 
active.  Since  January,  1900,  its  stock  has 
increased  from  $25,886,300  to  $344,606,400.  In 
six  years  (1906  to  1912),  the  Morgan  associates 
marketed  about  $300,000,000  bonds  of  that  com- 
pany or  its  subsidiaries.  In  that  period  the  vol- 
ume of  business  done  by  the  telephone  companies 
had,  of  course,  grown  greatly,  and  the  plant 
had  to  be  constantly  increased;  but  the  proceeds 
of  these  huge  security  issues  were  used,  to  a  large 
extent,  in  effecting  combinations;  that  is,  in 
buying  out  telephone  competitors;  in  buying 
control  of  the  Western  Union  Telegraph  Com- 
pany; and  in  buying  up  outstanding  stock 
interests  in  semi-independent  Bell  companies. 
It  is  these  combinations  which  have  led  to  the 
investigation  of  the  Telephone  Company  by  the 
Department  of  Justice;  and  they  are,  in  large 
part,  responsible  for  the  movement  to  have  the 
government  take  over  the  telephone  business. 


146         OTHER  PEOPLE'S  MONEY 

ELECTRICAL   MACHINERY 

The  business  of  manufacturing  electrical 
machinery  and  apparatus  is  only  a  little  over 
thirty  years  old.  J.  P.  ]\Iorgan  &  Co.  became 
interested  early  in  one  branch  of  it;  but  their 
dominance  of  the  business  today  is  due,  not  to 
their  ''initiating"  it,  but  to  their  effecting  a  com- 
bination, and  organizing  the  General  Electric 
Company  in  1892.  There  were  then  three 
large  electrical  companies,  the  Thomson-Hous- 
ton, the  Edison  and  the  Westinghouse,  besides 
some  small  ones.  The  Thomson-Houston  of 
Lynn,  Massachusetts,  was  in  many  respects  the 
leader,  having  been  formed  to  introduce,  among 
other  things,  important  inventions  of  Prof.  Elihu 
Thomson  and  Prof.  Houston.  L3'nn  is  one  of  the 
principal  shoe-manufacturing  centers  of  America. 
It  is  within  ten  miles  of  State  Street,  Boston;  but 
Thomson's  early  financial  support  came  not  from 
Boston  bankers,  but  mainly  from  Lynn  business 
men  and  investors;  men  active,  energetic,  and 
used  to  taking  risks  with  their  own  money. 
Prominent  among  them  was  Charles  A.  Coffin, 
a  shoe  manufacturer,  who  became  connected  with 
the  Thomson-Ht)uston  Company  upon  its  organi- 
zation and  president  of  the  General  Electric  when 
Mr.  Morgan  formed  that  company  in  1892,  by 


BIG  MEN  AND  LITTLE  BUSINESS  147 

combining  the  Thomson-Houston  and  the  Edison. 
To  his  continued  service,  supported  by  other 
Thomson-Houston  men  in  high  positions,  the 
great  prosperity  of  the  company  is,  in  large  part, 
due.  The  two  companies  so  combined  controlled 
probably  one-half  of  all  electrical  patents  then 
existing  in  America;  and  certainly  more  than 
half  of  those  which  had  any  considerable  value. 

In  1896  the  General  Electric  pooled  its  patents 
with  the  Westinghouse,  and  thus  competition  was 
further  restricted.  In  1903  the  General  Electric 
absorbed  the  Stanley  Electric  Company,  its 
other  large  competitor;  and  became  the  largest 
manufacturer  of  electric  apparatus  and  machinery 
in  the  world.  In  1912  the  resources  of  the  Com- 
pany were  $131,942,144.  It  billed  sales  to  the 
amount  of  $89,182,185.  It  employed  directly 
over  60,000  persons, — more  than  a  fourth  as  many 
as  the  Steel  Trust.  And  it  is  protected  against 
"undue"  competition;  for  one  of  the  Morgan 
partners  has  been  a  director,  since  1909,  in  the 
Westinghouse, — the  only  other  large  electrical 
machinery  company  in  America. 

THE    AUTOMOBILE 

The  automobile  industry  is  about  twenty 
years  old.     It  is  now  America's  most  prosperous 


148  OTHER  PEOPLE'S  MONEY 

business.  When  Henry  B.  Joy,  President  of  the 
Packard  Motor  Car  Company,  was  asked  to 
what  extent  the  bankers  aided  in  ''initiating" 
the  automobile,  he  replied: 

"It  is  the  observable  facts  of  history,  it  is  also 
my  experience  of  thirty  years  as  a  business  man, 
banker,  etc.,  that  first  the  seer  conceives  an  oppor- 
tunity. He  has  faith  in  his  almost  second  sight. 
He  believes  he  can  do  something — develop  a 
business — construct  an  industry — build  a  railroad 
— or  Niagara  Falls  Power  Company, — and  make 
it  pay! 

"Now  the  human  measure  is  not  the  actual 
physical  construction,  but  the  'make  it  pay'! 

"A  man  raised  the  money  in  the  late  '90s  and 
built  a  beet  sugar  factory  in  Michigan.  Wise- 
acres said  it  was  nonsense.  He  gathered  together 
the  money  from  his  friends  who  would  take  a 
chance  with  him.  He  not  only  built  the  sugar 
factory  (and  there  was  never  any  doubt  of  his 
ability  to  do  that)  but  he  made  it  pay.  The  next 
year  two  more  sugar  factories  were  built,  and 
were  financially  successful.  These  were  built  by 
private  individuals  of  wealth,  taking  chances 
in  the  face  of  cries  of  doubting  bankers  and 
trust  companies. 


BIG  MEN  AND  LITTLE  BUSINESS  149 

''Once  demonstrated  that  the  industry  was  a 
sound  one  financially  and  then  bankers  and  trust 
companies  would  lend  the  new  sugar  companies 
which  were  speedily  organized  a  large  part  of 
the  necessary  funds  to  construct  and  operate. 

''The  motor-car  business  was  the  same. 

"When  a  few  gentlemen  followed  me  in  my 
vision  of  the  possibilities  of  the  business,  the 
banks  and  older  business  men  (who  in  the  main 
were  the  banks)  said,  'fools  and  their  money  soon 
to  be  parted' — etc.,  etc. 

"Private  capital  at  first  establishes  an  industry, 
backs  it  through  its  troubles,  and,  if  possible, 
wins  financial  success  when  banks  would  not  lend 
a  dollar  of  aid. 

"The  business  once  having  proved  to  be  prac- 
ticable and  financially  successful,  then  do  the 
banks  lend  aid  to  its  needs." 

Such  also  was  the  experience  of  the  greatest  of 
the  many  financial  successes  in  the  automobile 
industry — the  Ford  Motor  Company. 

HOW  BANKERS  ARREST  DEVELOPMENT 

But  "great  banking  houses"  have  not  merely 
failed  to  initiate  industrial  development;  they 
have  definitely  arrested  development  because  to 


150         OTHER  PEOPLE'S  MONEY 

them  the  creation  of  the  trusts  is  largely  due. 
The  recital  in  the  ^Memorial  addressed  to  the 
President  by  the  Investors'  Guild  in  November, 
1911,  is  significant: 

"It  is  a  well-known  fact  that  modern  trade 
combinations  tend  strongl}'  toward  constancy  of 
process  and  products,  and  by  their  very  nature 
are  opposed  to  new  processes  and  new  products 
originated  by  independent  inventors,  and  hence 
tend  to  restrain  competition  in  the  development 
and  sale  of  patents  and  patent  rights;  and  con- 
sequently tend  to  discourage  independent  inven- 
tive thought,  to  the  great  detriment  of  the  nation, 
and  with  injustice  to  inventors  whom  the  Con- 
stitution especially  intended  to  encourage  and 
protect  in  their  rights." 

And  more  specific  was  the  testimony  of  the 

Engineering  News: 

"We  are  today  something  like  five  years  behind 
Germany  in  iron  and  steel  metallurgy,  and  such 
innovations  as  arc  being  introduced  by  our  iron 
and  steel  manufacturers  are  most  of  them  merely 
following  the  lead  set  by  foreigners  years  ago. 

"Wc  do  not  believe  this  is  because  American 


BIG  MEN  AND  LITTLE  BUSINESS  151 

engineers  are  any  less  ingenious  or  original  than 
those  of  Europe,  though  they  may  indeed  be 
deficient  in  training  and  scientific  education  com- 
pared with  those  of  Germany.  We  beheve  the 
main  cause  is  the  wholesale  consohdation  which 
has  taken  place  in  American  industry.  A  huge 
organization  is  too  clumsy  to  take  up  the  develop- 
ment of  an  original  idea.  With  the  market 
closely  controlled  and  profits  certain  by  following 
standard  methods,  those  who  control  our  trusts 
do  not  want  the  bother  of  developing  anything 
new. 

"We  instance  metallurgy  only  by  way  of  illus- 
tration. There  are  plenty  of  other  fields  of  indus- 
try where  exactly  the  same  condition  exists.  We 
are  building  the  same  machines  and  using  the 
same  methods  as  a  dozen  years  ago,  and  the  real 
advances  in  the  art  are  being  made  by  European 
inventors  and  manufacturers." 

To  which  President  Wilson's  stateijent  may 
be  added: 

"I  am  not  saying  that  all  invention  had  been 
stopped  by  the  growth  of  trusts,  but  I  think  it  is 
perfectly  clear  that  invention  in  many  fields  has 
been    discouraged,    that    inventors    have    been 


152  OTHER  PEOPLE'S  MONEY 

prevented  from  reaping  the  full  fruits  of  their 
ingenuity  and  industry,  and  that  mankind  has 
been  deprived  of  many  comforts  and  con- 
veniences, as  well  as  the  opportunity  of  buying 
at  lower  prices. 

"Do  you  know,  have  you  had  occasion  to 
learn,  that  there  is  no  hospitality  for  invention, 
now-a-days?" 

TRUSTS   AND    FINANCIAL   CONCENTRATION 

The  fact  that  industrial  monopolies  arrest 
development  is  more  serious  even  than  the 
direct  burden  imposed  through  extortionate 
prices.  But  the  most  harm-bearing  incident  of 
the  trusts  is  their  promotion  of  financial  con- 
centration. Industrial  trusts  feed  the  money 
trust.  Practically  every  trust  created  has  de- 
stroyed the  financial  independence  of  some 
communities  and  of  many  properties;  for  it  has 
centered  the  financing  of  a  large  part  of  whole 
lines  of  business  in  New  York,  and  this  usually 
with  one  of  a  few  banking  houses.  This  is  well 
illustrated  by  the  Steel  Trust,  which  is  a  trust  of 
trusts;  that  is,  the  Steel  Trust  combines  in  one 
huge  holding  company  the  trusts  previously 
formed  in  the  different  branches  of  the  steel 
business.     Thus   the  Tube  Trust  combined   17 


BIG  MEN  AND  LITTLE  BUSINESS  153 

tube  mills,  located  in  16  different  cities,  scat- 
tered over  5  states  and  owned  by  13  different 
companies.  The  wire  trust  combined  19  mills; 
the  sheet  steel  trust  26;  the  bridge  and  structural 
trust  27;  and  the  tin  plate  trust  36;  all  scattered 
similarly  over  many  states.  Finally  these  and 
other  companies  were  formed  into  the  United 
States  Steel  Corporation,  combining  228  com- 
panies in  all,  located  in  127  cities  and  towns, 
scattered  over  18  states.  Before  the  combina- 
tions were  effected,  nearly  every  one  of  these 
companies  was  owned  largely  by  those  who 
managed  it,  and  had  been  financed,  to  a  large 
extent,  in  the  place,  or  in  the  state,  in  which  it 
was  located.  When  the  Steel  Trust  was  formed 
all  these  concerns  came  under  one  management. 
Thereafter,  the  financing  of  each  of  these  228 
corporations  (and  some  which  were  later  ac- 
quired) had  to  be  done  through  or  with  the 
consent  of  J.  P.  Morgan  &  Co.  That  was  the 
greatest  step  in  financial  concentration  ever  taken. 

STOCK   EXCHANGE    INCIDENTS 

The  organization  of  trusts  has  served  in  another 
way  to  increase  the  power  of  the  Money  Trust. 
Few  of  the  independent  concerns  out  of  which 
the  trusts  have  been  formed,  were  listed  on  the 


154  OTHER  PEOPLE'S  MONEY 

New  York  Stock  Exchange;  and  few  of  them  had 
financial  offices  in  New  York.  Promoters  of 
large  corporations,  whose  stock  is  to  be  held  by 
the  public,  and  also  investors,  desire  to  have  their 
securities  listed  on  the  New  York  Stock  Exchange. 
Under  the  rules  of  the  Exchange,  no  security  can 
be  so  listed  unless  the  corporation  has  a  transfer 
agent  and  registrar  in  New  York  City.  Further- 
more, banker-directorships  have  contributed 
largely  to  the  establishment  of  the  financial 
offices  of  the  trusts  in  New  York  City.  That 
alone  would  tend  to  financial  concentration. 
But  the  listing  of  the  stock  enhances  the  power 
of  the  Money  Trust  in  another  way.  An  in- 
dustrial stock,  once  listed,  frequently  becomes 
the  subject  of  active  speculation;  and  speculation 
feeds  the  Money  Trust  indirectly  in  many  ways. 
It  draws  the  money  of  the  country  to  New  York. 
The  New  York  bankers  handle  the  loans  of  other 
people's  money  on  the  Stock  Exchange;  and 
members  of  the  Stock  Exchange  receive  large 
amounts  from  commissions.  For  instance:  There 
are  5,084,952  shares  of  United  States  Steel  com- 
mon stock  outstanding.  But  in  the  five  years 
ending  December  31,  1912,  speculation  in  that 
stock  was  so  extensive  that  there  were  sold  on 
the  Exchange  an  average  of  29,380,888  shares 


BIG  MEN  AND  LITTLE  BUSINESS  155 

a  year;  or  nearly  six  times  as  much  as  there 
is  Steel  common  in  existence.  Except  where 
the  transactions  are  by  or  for  the  brokers,  sales 
on  the  Exchange  involve  the  payment  of  twenty- 
five  cents  in  commission  for  each  share  of  stock 
sold;  that  is,  twelve  and  one-half  cents  by  the 
seller  and  twelve  and  one-half  cents  by  the  buyer. 
Thus  the  commission  from  the  Steel  common 
alone  afforded  a  revenue  averaging  many  millions 
a  year.  The  Steel  preferred  stock  is  also  much 
traded  in;  and  there  are  138  other  industrials, 
largely  trusts,  listed  on  the  New  York  Stock 
Exchange. 

TEUST   RAMIFICATIONS 

But  the  potency  of  trusts  as  a  factor  in  financial 
concentration  is  manifested  in  still  other  ways; 
notably  through  their  ramifying  operations. 
This  is  illustrated  forcibly  by  the  General  Electric 
Company's  control  of  water-power  companies 
which  has  now  been  disclosed  in  an  able  report  of 
the  United  States  Bureau  of  Corporations: 

*'The  extent  of  the  General  Electric  influence 
is  not  fully  revealed  by  its  consolidated  balance 
sheet.  A  very  large  number  of  corporations  are 
connected  with  it  through  its  subsidiaries  and 


156         OTHER  PEOPLE'S  MONEY 

through  corporations  controlled  by  these  sub- 
sidiaries or  affiliated  with  them.  There  is  a  still 
wider  circle  of  influence  due  to  the  fact  that 
officers  and  directors  of  the  General  Electric 
Co.  and  its  subsidiaries  are  also  officers  or 
directors  of  many  other  corporations,  some  of 
whose  securities  are  owned  by  the  General 
Electric  Company. 

''The  General  Electric  Company  holds  in  the 
first  place  all  the  common  stock  in  three  security 
holding  companies :  the  United  Electric  Securities 
Co.,  the  Electrical  Securities  Corporation,  and 
the  Electric  Bond  and  Share  Co.  Directly  and 
through  these  corporations  and  their  officers  the 
General  Electric  controls  a  large  part  of  the 
water  power  of  the  United  States. 

.  .  .  ''The  water-power  companies  in  the 
General  Electric  group  are  found  in  18  States. 
These  18  States  have  2,325,757  commercial 
horsepower  developed  or  under  construction, 
and  of  this  total  the  General  Electric  group  in- 
cludes 939,115  h.  p.  or  40.4  per  cent.  The 
greatest  amount  of  power  controlled  by  the 
companies  in  the  General  Electric  group  in  any 
State  is  found  in  Washington.  This  is  followed 
by  New  York,  Pennsylvania,  California,  Mon- 
tana, Iowa,  Oregon,  and  Colorado.     In  five  of 


BIG  MEN  AND  LITTLE  BUSINESS  157 

the  States  shown  in  the  table  the  water-power 
companies  included  in  the  General  Electric  group 
control  more  than  50  per  cent,  of  the  com- 
mercial power,  developed  and  under  construction. 
The  percentage  of  power  in  the  States  included  in 
the  General  Electric  group  ranges  from  a  little 
less  than  2  per  cent,  in  Michigan  to  nearly  80 
per  cent,  in  Pennsylvania.  In  Colorado  they 
control  72  per  cent.;  in  New  Hampshire  61  per 
cent. ;  in  Oregon  58  per  cent. ;  and  in  Washington 
55  per  cent. 

Besides  the  power  developed  and  under  con- 
struction water-power  concerns  included  in  the 
General  Electric  group  own  in  the  States  shown 
in  the  table  641,600  h.  p.  undeveloped." 

This  water  power  control  enables  the  General 
Electric  group  to  control  other  public  service 
corporations : 

"The  water-power  companies  subject  to 
General  Electric  influence  control  the  street 
railways  in  at  least  16  cities  and  towns;  the 
electric-light  plants  in  78  cities  and  towns;  gas 
plants  in  19  cities  and  towns;  and  are  affiliated 
with  the  electric  hght  and  gas  plants  in  other 
towns.  Though  many  of  these  communities, 
particularly   those   served   with   light   only,    are 


158  OTHER  PEOPLE'S  MONEY 

small,  several  of  them  are  the  most  important  in 
the  States  where  these  water-power  companies 
operate.  The  water-power  companies  in  the 
General  Electric  group  own,  control,  or  are 
closely  affiliated  with,  the  street  railways  in 
Portland  and  Salem,  Ore.;  Spokane,  Wash.; 
Great  Falls,  ]\Iont.;  St.  Louis,  Mo.;  Winona, 
IMinn.;  ^Milwaukee  and  Racine,  Wis.;  Elmira, 
N.  Y.;  Ashcville  and  Raleigh,  N.  C.,  and  other 
relatively  less  important  towns.  The  towns  in 
which  the  lighting  plants  (electric  or  gas)  are 
owned  or  controlled  include  Portland,  Salem, 
Astoria,  and  other  towns  in  Oregon;  Bellingham 
and  other  towns  in  Washington;  Butte,  Great 
Falls,  Bozeman  and  other  towns  in  Montana; 
Leadville  and  Colorado  Springs  in  Colorado; 
St.  Louis,  Mo.;  Milwaukee,  Racine  and  several 
small  towns  in  Wisconsin;  Hudson  and  Rens- 
selaer, N.  Y.;  Detroit,  Mich.;  Asheville  and 
Raleigh,  N.  C;  and  in  fact  one  or  more  towns  in 
practically  every  community  where  developed 
water  power  is  controlled  by  this  group.  In 
addition  to  the  public-service  corporations  thus 
controlled  by  the  water-power  companies  subject 
to  General  Electric  influence,  there  are  numerous 
public-service  corporations  in  other  municipalities 
that    purchase    power    from    the    hydroelectric 


BIG  MEN  AND  LITTLE  BUSINESS  159 

developments  controlled  by  or  affiliated  with  the 
General  Electric  Co.  This  is  true  of  Denver, 
Colo.,  which  has  already  been  discussed.  In 
Baltimore,  Md.,  a  water-power  concern  in  the 
General  Electric  group,  namely,  the  Pennsylvania 
Water  &  Power  Co.,  sells  20,000  h.  p.  to  the 
Consolidated  Gas,  Electric  Light  &  Power  Co., 
which  controls  the  entire  light  and  power  business 
of  that  city.  The  power  to  operate  all  the 
electric  street  railway  systems  of  Buffalo,  N.  Y., 
and  vicinity,  involving  a  trackage  of  approxi- 
mately 375  miles,  is  supplied  through  a  subsidiary 
of  the  Niagara  Falls  Power  Co." 

And  the  General  Electric  Company,  through 
the  financing  of  public  service  companies,  exer- 
cises a  Hke  influence  in  communities  where  there 
is  no  water  power: 

"It,  or  its  subsidiaries,  has  acquired  control  of 
or  an  interest  in  the  public-service  corporations 
of  numerous  cities  where  there  is  no  water-power 
connection,  and  it  is  affiliated  with  still  others  by 
virtue  of  common  directors.  .  .  .  This  vast 
network  of  relationship  between  hydro-electric 
corporations  through  prominent  officers  and 
directors  of  the  largest  manufacturer  of  electrical 
machinery  and  supplies  in  the  United  States  is 
highly  significant.   .    .    . 


160  OTHER  PEOPLE'S  IMONEY 

"It  is  possible  that  this  relationship  to  such  a 
large  number  of  strong  financial  concerns,  through 
common  officers  and  directors,  affords  the  General 
Electric  Co.  an  advantage  that  may  place  rivals 
at  a  corresponding  disadvantage.  Whether  or 
not  this  great  financial  power  has  been  used  to 
the  particular  disadvantage  of  any  rival  water- 
power  concern  is  not  so  important  as  the  fact  that 
such  power  exists  and  that  it  might  be  so  used  at 
any  time." 

THE  SHERMAN  LAW 

The  Money  Trust  cannot  be  broken,  if  we 
allow  its  power  to  be  constantly  augmented. 
To  break  the  Money  Trust,  we  must  stop  that 
power  at  its  source.  The  industrial  trusts  are 
among  its  most  effective  feeders.  Those  which 
are  illegal  should  be  dissolved.  The  creation  of 
new  ones  should  be  prevented.  To  this  end  the 
Sherman  Law  should  be  supplemented  both  by 
providing  more  efficient  judicial  machinery, 
and  by  creating  a  commission  with  administra- 
tive functions  to  aid  in  enforcing  the  law. 
When  that  is  done,  another  step  will  have  been 
taken  toward  securing  the  New  Freedom.  But 
restrictive  legislation  alone  will  not  suffice.  We 
should  bear  in  mind  the  admonition  with  which 


BIG  MEN  AND  LITTLE  BUSINESS  IGl 

the  Commissioner  of  Corporations  closes  his 
review  of  our  water  power  development: 

''There  is  .  .  .  presented  such  a  situation  in 
water  powers  and  other  public  utilities  as  might 
bring  about  at  any  time  under  a  single  manage- 
ment the  control  of  a  majority  of  the  developed 
water  power  in  the  United  States  and  similar 
control  over  the  public  utilities  in  a  vast  number 
of  cities  and  towns,  including  some  of  the  most 
important  in  the  country." 

We  should  conserve  all  rights  which  the  Fed- 
eral Government  and  the  States  now  have  in 
our  natural  resources,  and  there  should  be  a 
complete  separation  of  our  industries  from  rail- 
roads and  public  utilities. 


CHAPTER  VIII 

A  CURSE  OF  BIGNESS 

Bigness  has  been  an  important  factor  in  the 
rise  of  the  ]\Ioney  Trust:  Big  railroad  systems, 
Big  industrial  trusts,  Big  public  service  com- 
panies; and  as  instruments  of  these  Big  banks 
and  Big  trust  companies.  J.  P.  Morgan  &  Co. 
(in  their  letter  of  defence  to  the  Pujo  Committee) 
urge  the  needs  of  Big  Business  as  the  justification 
for  financial  concentration.  They  declare  that 
what  they  euphemistically  call  "cooperation" 
is  "simply  a  further  result  of  the  necessity  for 
handling  great  transactions";  that  "the  country 
obviously  requires  not  only  the  larger  individual 
banks,  but  demands  also  that  those  banks  shall 
cooperate  to  perform  efficiently  the  country's 
business";  and  that  "a  step  backward  along  this 
line  would  mean  a  halt  in  industrial  progress 
that  would  affect  every  wage-earner  from  the 
Atlantic  to  the  Pacific."  The  phrase  "great 
transactions"  is  used  by  the  bankers  apparently 
as  meaning  large  corporate  security  issues. 

Leading  bankers  have  undoul)tcdly  cooperated 

during  the  last  15  years  in  floating  some  very 

\6i 


A  CURSE  OF  BIGNESS  163 

large  security  issues,  as  well  as  many  small  ones. 
But  relatively  few  large  issues  were  made 
necessary  by  great  improvements  undertaken  or 
by  industrial  development.  Improvements  and 
development  ordinarily  proceed  slowly.  For 
them,  even  where  the  enterprise  involves  large 
expenditures,  a  series  of  smaller  issues  is  usually 
more  appropriate  than  single  large  ones.  This  is 
particularly  true  in  the  East  where  the  building 
of  new  railroads  has  practically  ceased.  The 
"great"  security  issues  in  which  bankers  have 
cooperated  were,  with  relatively  few  exceptions, 
made  either  for  the  purpose  of  effecting  com- 
binations or  as  a  consequence  of  such  combina- 
tions. Furthermore,  the  combinations  which 
made  necessary  these  large  security  issues  or 
underwritings  were,  in  most  cases,  either  contrary 
to  existing  statute  law,  or  contrary  to  laws  recom- 
mended by  the  Interstate  Commerce  Commis- 
sion, or  contrary  to  the  laws  of  business  efficiency. 
So  both  the  financial  concentration  and  the 
combinations  which  they  have  served  were,  in 
the  main,  against  the  public  interest.  Size, 
we  are  told,  is  not  a  crime.  But  size  may,  at 
least,  become  noxious  by  reason  of  the  means 
through  which  it  was  attained  or  the  uses  to 
which   it  is  put.     And   it   is   size   attained   by 


164  OTHER  PEOPLE'S  MONEY 

combination,  instead  of  natural  growth,  which 
has  contributed  so  largely  to  our  financial  con- 
centration.    Let  us  examine  a  few  cases: 

THE    HARRIMAN    PACIFICS 

J.  P.  Morgan  &  Co.,  in  urging  the  "need  of 
large  banks  and  the  cooperation  of  bankers," 
said: 

"The  Attorney-General's  recent  approval  of 
the  Union  Pacific  settlement  calls  for  a  single  com- 
mitment on  the  part  of  bankers  of  $126,000,000." 

This  §126,000,000  "commitment"  was  not 
made  to  enable  the  Union  Pacific  to  secure 
capital.  On  the  contrary  it  was  a  guaranty  that 
it  would  succeed  in  disposing  of  its  Southern 
Pacific  stock  to  that  amount.  And  when  it  had 
disposed  of  that  stock,  it  was  confronted  with  the 
serious  problem — what  to  do  with  the  proceeds? 
This  huge  underwriting  became  necessary  solely 
because  the  Union  Pacific  had  violated  the 
Sherman  Law.  It  had  acquired  that  amount  of 
Southern  Pacific  stock  illegally;  and  the  Supreme 
Court  of  the  United  States  finally  decreed  that 
the  illegality  cease.  This  same  illegal  purchase 
had  been  the  occasion,  twelve  years  earlier,  of 
another  "groat  transaction," — the  issue  of  a 
S  100,000,000  of  Union  Pacific  bonds,  which  were 


A  CURSE  OF  BIGNESS  165 

sold  to  provide  funds  for  acquiring  this  Southern 
Pacific  and  other  stocks  in  violation  of  law. 
Bankers  ''cooperated"  also  to  accomplish  that. 

UNION   PACIFIC   IMPROVEMENTS 

The  Union  Pacific  and  its  auxiliary  lines  (the 
Oregon  Short  Line,  the  Oregon  Railway  and 
Navigation  and  the  Oregon-Washington  Railroad) 
made,  in  the  fourteen  years,  ending  June  30, 1912, 
issues  of  securities  aggregating  $375,158,183  (of 
which  $46,500,000  were  refunded  or  redeemed); 
but  the  large  security  issues  served  mainly  to  sup- 
ply funds  for  engaging  in  illegal  combinations  or 
stock  speculation.  The  extraordinary  improve- 
ments and  additions  that  raised  the  Union  Pacific 
Railroad  to  a  high  state  of  efficiency  were 
provided  mainly  by  the  net  earnings  from  the 
operation  of  its  railroads.  And  note  how  great 
the  improvements  and  additions  were:  Tracks 
were  straightened,  grades  were  lowered,  bridges 
were  rebuilt,  heavy  rails  were  laid,  old  equipment 
was  replaced  by  new;  and  the  cost  of  these  was 
charged  largely  as  operating  expense.  Additional 
equipment  was  added,  new  lines  were  built 
or  acquired,  increasing  the  system  by  3524 
miles  of  line,  and  still  other  improvements  and 
betterments  were  made  and  charged  to  capital 


166         OTHER  PEOPLE'S  MONEY 

account.  These  expenditures  aggi'egated  S191,- 
512,328.  But  it  needed  no  "large  security 
issues"  to  provide  the  capital  thus  wisely  ex- 
pended. The  net  earnings  from  the  operations 
of  these  railroads  were  so  large  that  nearly  all 
these  improvements  and  additions  could  have 
been  made  without  issuing  on  the  average  more 
than  SI, 000,000  a  year  of  additional  securities  for 
"new  money,"  and  the  company  still  could  have 
paid  six  per  cent,  dividends  after  1906  (when  that 
rate  was  adopted).  For  while  $13,679,452  a 
year,  on  the  average,  was  charged  to  Cost 
of  Road  and  Equipment,  the  surplus  net 
earnings  and  other  funds  would  have  yielded,  on 
the  average,  $12,750,982  a  year  available  for 
improvements  and  additions,  without  raising 
money  on  new  security  issues. 

HOW  THE  SECURITY  PROCEEDS  WERE  SPENT 

The  8375,000,000  securities  (except  to  the 
extent  of  about  $13,000,000  required  for  im- 
provements, and  the  amounts  applied  for  refund- 
ing and  redemptions)  were  available  to  buy 
stocks  and  bonds  of  other  companies.  And  some 
of  the  stocks  so  acquired  were  sold  at  large 
profits,  providing  further  sums  to  be  employed 
in  stock  purchases. 


A  CURSE  OF  BIGNESS  167 

The  $375,000,000  Union  Pacific  Lines  security 
issues,  therefore,  were  not  needed  to  supply 
funds  for  Union  Pacific  improvements;  nor  did 
these  issues  supply  funds  for  the  improvement  of 
any  of  the  companies  in  which  the  Union  Pacific 
invested  (except  that  certain  amounts  were 
advanced  later  to  aid  in  financing  the  Southern 
Pacific).  They  served,  substantially,  no  purpose 
save  to  transfer  the  ownership  of  railroad  stocks 
from  one  set  of  persons  to  another. 

Here  are  some  of  the  principal  investments: 

1.  $91,657,500,   in  acquiring  and    financing    the   Southern 

Pacific. 

2.  $89,391,401,  in  acquiring  the  Northern  Pacific  stock  and 

stock  of  the  Northern  Securities  Co. 

3.  $45,466,960,  in  acquiring  Baltimore  &  Ohio  stock. 

4.  $37,692,256,  in  acquiring  Illinois  Central  stock. 

5.  $23,205,679,  in  acquiring  New  York  Central  stock. 

6.  $10,395,000,  in  acquiring  Atchison,  Topeka  &  Santa  Fe 

stock. 

7.  $8,946,781,  in  acquiring  Chicago  &  Alton  stock. 

8.  $11,610,187,  in  acquiring  Chicago,  Milwaukee  &  St.  Paul 

stock. 

9.  $6,750,423,  in  acquiring  Chicago  &  Northwestern  stock. 
10.    $6,936,696,   in  acquiring   Railroad  Securities   Co.  stock 

(Illinois  Central  stock.) 

The  immediate  effect  of  these  stock  acquisi- 
tions, as  stated  by  the  Interstate  Commerce 
Commission  in  1907,  was  merely  this; 


168         OTHER  PEOPLE'S  MONEY 

"Mr.  Harriman  maj'  journey  by  steamship 
from  New  York  to  New  Orleans,  thence  by  rail 
to  San  Francisco,  across  the  Pacific  Ocean  to 
China,  and,  returning  by  another  route  to  the 
United  States,  may  go  to  Ogden  by  any  one  of 
three  rail  lines,  and  thence  to  Kansas  City  or 
Omaha,  without  leaving  the  deck  or  platform 
of  a  carrier  which  he  controls,  and  without 
duplicating  any  part  of  his  journey. 

"He  has  further  what  appears  to  be  a  dominant 
control  in  the  Illinois  Central  Railroad  running 
directly  north  from  the  Gulf  of  Mexico  to  the 
Great  Lakes,  parallel  to  the  Mississippi  River; 
and  two  thousand  miles  west  of  the  Mississippi 
he  controls  the  only  line  of  railroad  parallel  to 
the  Pacific  Coast,  and  running  from  the  Colorado 
River  to  the  Mexican  border.   .    .    . 

"The  testimony  taken  at  this  hearing  shows 
that  about  fifty  thousand  square  miles  of  terri- 
tory in  the  State  of  Oregon,  surrounded  by  the 
lines  of  the  Oregon  Short  Line  Railroad  Com- 
pany, the  Oregon  Railroad  and  Navigation 
Company,  and  the  Southern  Pacific  Company, 
is  not  developed.  While  the  funds  of  those 
companies  which  could  be  used  for  that  purpose 
arc  being  invested  in  stocks  like  the  New  York 
Central  and  other  lines  having  only  a  remote 


A  CURSE  OF  BIGNESS  169 

relation  to  the  territory  in  which  the  Union  Pacific 
System  is  located." 

Mr.  Harriman  succeeded  in  becoming  director 
in  27  railroads  with  39,354  miles  of  Hne;  and  they 
extended  from  the  Atlantic  to  the  Pacific;  from 
the  Great  Lakes  to  the  Gulf  of  Mexico. 

THE    AFTERMATH 

On  September  9,  1909,  less  than  twelve  years 
after  Mr.  Harriman  first  became  a  director  in  the 
Union  Pacific,  he  died  from  overwork  at  the  age 
of  61.  But  it  was  not  death  only  that  had 
set  a  limit  to  his  achievements.  The  multiplicity 
of  his  interests  prevented  him  from  performing 
for  his  other  railroads  the  great  services  that  had 
won  him  a  world-wide  reputation  as  manager 
and  rehabilitator  of  the  Union  Pacific  and  the 
Southern  Pacific.  Within  a  few  months  after 
Mr.  Harriman's  death  the  serious  equipment 
scandal  on  the  Illinois  Central  became  public, 
culminating  in  the  probable  suicide  of  one  of  the 
vice-presidents  of  that  company.  The  Chicago 
&  Alton  (in  the  management  of  which  Mr. 
Harriman  was  prominent  from  1899  to  1907,  as 
President,  Chairman  of  the  Board,  or  Executive 
Committeeman),  has  never  regained  the  pros- 
perity it  enjoyed  before  he  and  his  ^.ssociates 


170         OTHER  PEOPLE'S  MONEY 

acquired  control.  The  P^re  IMarquette  has 
passed  again  into  receiver's  hands.  Long  before 
Mr.  Harriman's  death  the  Union  Pacific  had 
disposed  of  its  Northern  Pacific  stock,  because 
the  Supreme  Court  of  the  United  States  declared 
the  Northern  Securities  Company  illegal,  and 
dissolved  the  Northern  Pacific-Great  Northern 
merger.  Three  years  after  his  death,  the  Su- 
preme Court  of  the  United  States  ordered  the 
Union  Pacific-Southern  Pacific  merger  dissolved. 
By  a  strange  irony,  the  law  has  permitted  the 
Union  Pacific  to  reap  large  profits  from  its  illegal 
transactions  in  Northern  Pacific  and  Southern 
Pacific  stocks.  But  many  other  stocks  held 
"as  investments"  have  entailed  large  losses. 
Stocks  in  the  Illinois  Central  and  other  com- 
panies which  cost  the  Union  Pacific  $129,894,- 
991.72,  had  on  November  15,  1913,  a  market 
value  of  only  $87,851,500;  showing  a  shrinkage 
of  $42,043,491.72  and  the  average  income  from 
them,  while  held,  was  only  about  4.30  per  cent, 
on  their  cost. 

A  bankers'  paradise 

Kuhn,  Loeb  &  Co.  were  the  Union  Pacific 
bankers.  It  was  in  pursuance  of  a  promise  which 
Mr.  Jacob  H.   Schiff — the  senior  partner — had 


A  CURSE  OF  BIGNESS  171 

given,  pending  the  reorganization,  that  Mr. 
Harriman  first  became  a  member  of  the  Executive 
Committee  in  1897.  Thereafter  combinations 
grew  and  crumbled,  and  there  were  vicissi- 
tudes in  stock  speculations.  But  the  investment 
bankers  prospered  amazingly;  and  financial  con- 
centration proceeded  without  abatement.  The 
bankers  and  their  associates  received  the  com- 
missions paid  for  purchasing  the  stocks  which 
the  Supreme  Court  holds  to  have  been  acquired 
illegally — and  have  retained  them.  The  bankers 
received  commissions  for  underwriting  the  securi- 
ties issued  to  raise  the  money  with  which  to  buy 
the  stocks  which  the  Supreme  Court  holds  to  have 
been  illegally  acquired,  and  have  retained  them. 
The  bankers  received  commissions  paid  for  floating 
securities  of  the  controlled  companies — while 
they  were  thus  controlled  in  violation  of  law — and 
have,  of  course,  retained  them.  Finally  when, 
after  years,  a  decree  is  entered  to  end  the  illegal 
combination,  these  same  bankers  are  on  hand 
to  perform  the  services  of  undertaker — and 
receive  further  commissions  for  their  banker-aid 
in  enabling  the  law-breaking  corporation  to  end 
its  wrong  doing  and  to  comply  with  the  decree  of 
the  Supreme  Court.  And  yet,  throughout  nearly 
all  this  long  period,  both  before  and  after  Mr. 


172         OTHER  PEOPLE'S  MONEY 

Harriman's  death,  two  partners  in  Kuhn,  Loeb  & 
Co.  were  directors  or  members  of  the  executive 
committee  of  the  Union  Pacific;  and  as  such 
must  be  deemed  responsible  with  others  for  the 
illegal  acts. 

Indeed,  these  bankers  have  not  only  received 
commissions  for  the  underwritings  of  transactions 
accomplished,  though  illegal;  they  have  re- 
ceived commissions  also  for  merely  agreeing  to 
underwrite  a  "great  transaction"  which  the 
authorities  would  not  permit  to  be  accomplished. 
The  $126,000,000  underwriting  (that  ''single 
commitment  on  the  part  of  bankers"  to  which 
J.  P.  Morgan  &  Co.  refer  as  being  called  for  by 
"the  Attorney  General's  approval  of  the  Union 
Pacific  settlement")  never  became  effective; 
because  the  Public  Service  Commission  of  Cali- 
fornia refused  to  approve  the  terms  of  settlement. 
But  the  Union  Pacific,  nevertheless,  paid  the 
Kuhn  Loeb  Syndicate  a  large  underwriting  fee  for 
having  been  ready  and  willing  "to  serve,"  should 
the  opportunity  arise:  and  another  underwriting 
commission  was  paid  when  the  Southern  Pacific 
stock  was  finally  distributed,  with  the  approval 
of  Attorney  General  McRcynolds,  under  the 
Court's  decree.  Thus  the  illegal  purchase  of 
Southern    Pacific    stock    yielded    directly    four 


A  CURSE  OF  BIGNESS  173 

crops  of  commissions;  two  when  it  was  acquired, 
and  two  when  it  was  disposed  of.  And  during 
the  intervening  period  the  illegally  controlled 
Southern  Pacific  yielded  many  more  commissions 
to  the  bankers.  For  the  schedules  filed  with  the 
Pujo  Committee  show  that  Kuhn,  Loeb  &  Co. 
marketed,  in  addition  to  the  Union  Pacific 
securities  above  referred  to,  $334,000,000  of 
Southern  Pacific  and  Central  Pacific  securities 
between  1903  and  1911. 

The  aggregate  amount  of  the  commissions  paid 
to  these  bankers  in  connection  with  Union 
Pacific-Southern  Pacific  transactions  is  not  dis- 
closed. It  must  have  been  very  large;  for  not 
only  were  the  transactions  ''great";  but  the 
commissions  were  liberal.  The  Interstate  Com- 
merce Commission  finds  that  bankers  received 
about  5  per  cent,  on  the  purchase  price  for  buying 
the  first  750,000  shares  of  Southern  Pacific  stock; 
and  the  underwriting  commission  on  the  first 
$100,000,000  Union  Pacific  bonds  issued  to  make 
that  and  other  purchases  was  $5,000,000.  How 
large  the  two  underwriting  commissions  were 
which  the  Union  Pacific  paid  in  efTecting  the 
severance  of  this  illegal  merger,  both  the  company 
and  the  bankers  have  declined  to  disclose. 
Furthermore    the    Interstate    Commerce    Com- 


174         OTHER  PEOPLE'S  MONEY 

mission  showed,  clearly,  while  investigating  the 
Union  Pacific's  purchase  of  the  Chicago  &  Alton 
stock,  that  the  bankers'  profits  were  by  no  means 
confined  to  commissions. 


THE   BURLINGTON 

Such  railroad  combinations  produce  injury 
to  the  public  far  more  serious  than  the  heavy  tax 
of  bankers'  commissions  and  profits.  For  in 
nearly  every  case  the  absorption  into  a  great 
system  of  a  theretofore  independent  railroad  has 
involved  the  loss  of  financial  independence  to 
some  community,  property  or  men,  who  thereby 
become  subjects  or  satellites  of  the  Money  Trust. 
The  passing  of  tho  Chicago,  Burlington  &  Quincy, 
in  1901,  to  the  Morgan  associates,  presents  a 
striking  example  of  this  process. 

After  the  Union  Pacific  acquired  the  Southern 
Pacific  stock  in  1901,  it  sought  control,  also,  of 
the  Chicago,  Burlington  &  Quincy, — a  most 
prosperous  railroad,  having  then  7912  miles  of 
line.  The  Great  Northern  and  Northern  Pacific 
recognized  that  Union  Pacific  control  of  the 
Burlington  would  exclude  them  from  much  of 
Illinois,  Missouri,  Wisconsin,  Kansas,  Nebraska, 
Iowa,    and   South   Dakota.     The   two   northern 


A  CURSE  OF  BIGNESS  175 

roads,  which  were  already  closely  allied  with 
each  other  and  with  J.  P.  Morgan  &  Co.,  there- 
upon purchased  for  $215,227,000,  of  their  joint 
4  per  cent,  bonds,  nearly  all  of  the  $109,324,000 
(par  value)  outstanding  Burlington  stock.  A 
struggle  with  the  Union  Pacific  ensued  which 
yielded  soon  to  ''harmonious  cooperation."  The 
Northern  Securities  Company  was  formed  with 
$400,000,000  capital,  thereby  merging  the  Great 
Northern,  the  Northern  Pacific  and  the  Burling- 
ton, and  joining  the  Harriman,  Kuhn-Loeb,  with 
the  Morgan-Hill  interests.  Obviously  neither 
the  issue  of  $215,000,000  joint  4's,  nor  the  issue 
of  the  $400,000,000  Northern  Securities  stock 
supplied  one  dollar  of  funds  for  improvements  of, 
or  additions  to,  any  of  the  four  great  railroad 
systems  concerned  in  these  "large  transactions." 
The  sole  effect  of  issuing  $615,000,000  of  securities 
was  to  transfer  stock  from  one  set  of  persons  to 
another.  And  the  resulting  ''harmonious  co- 
operation" was  soon  interrupted  by  the  govern- 
ment proceedings,  which  ended  with  the  dissolu- 
tion of  the  Northern  Securities  Company.  But 
the  evil  done  outlived  the  combination.  The 
Burlington  had  passed  forever  from  its  inde- 
pendent Boston  owners  to  the  Morgan  allies, 
who  remain  in  control. 


176         OTHER  PEOPLE'S  MONEY 

The  Burlington — one  of  Boston's  finest  achieve- 
ments— was  the  creation  of  John  M.  Forbes. 
He  was  a  builder;  not  a  combiner,  or  banker,  or 
wizard  of  finance.  He  was  a  simple,  hard- 
working business  man.  He  had  been  a  merchant 
in  China  at  a  time  when  China's  trade  was  among 
America's  big  business.  He  had  been  connected 
with  shipping  and  with  manufactures.  He  had 
the  imagination  of  the  great  merchant;  the 
patience  and  perseverance  of  the  great  manu- 
facturer; the  courage  of  the  sea-farer;  and  the 
broad  view  of  the  statesman.  Bold,  but  never 
reckless;  scrupulously  careful  of  other  people's 
money,  he  was  ready,  after  due  weighing  of 
chances,  to  risk  his  own  in  enterprises  promising 
success.  He  was  in  the  best  sense  of  the  term,  a 
great  adventurer.  Thus  equipped,  Mr.  Forbes 
entered,  in  1852,  upon  those  railroad  enterprises 
which  later  developed  into  the  Chicago,  Burling- 
ton &  Quincy.  Largely  with  his  own  money 
and  that  of  friends  who  confided  in  him,  he 
built  these  railroads  and  carried  them  through  the 
panic  of  '57,  when  the  "great  banking  houses" 
of  those  days  lacked  courage  to  assume  the 
burdens  of  a  struggling  ill-constructed  line, 
staggering  under  financial  difficulties. 


A  CURSE  OF  BIGNESS  177 

Under  his  wise  management,  and  that  of  the 
men  whom  he  trained,  the  little  Bui-lington 
became  a  great  system.  It  was  "built  on  honor," 
and  managed  honorably.  It  weathered  every 
other  great  financial  crisis,  as  it  did  that  of  1857. 
It  reached  maturity  without  a  reorganization  or 
the  sacrifice  of  a  single  stockholder  or  bondholder. 

Investment  bankers  had  no  place  on  the 
Burhngton  Board  of  Directors;  nor  had  the 
banker-practice,  of  being  on  both  sides  of  a 
bargain.  ''I  am  unwilling,"  said  Mr.  Forbes, 
early  in  his  career,  "to  run  the  risk  of  having 
the  imputation  of  buying  from  a  company  in 
which  I  am  interested."  About  twenty  years 
later  he  made  his  greatest  fight  to  rescue  the 
Burlington  from  the  control  of  certain  contractor- 
directors,  whom  his  biographer,  Mr.  Pearson, 
describes  as  "persons  of  integrity,  who  had 
conceived  that  in  their  twofold  capacity  as 
contractors  and  directors  they  were  fully  able  to 
deal  with  themselves  justly."  Mr.  Forbes 
thought  otherwise.  The  stockholders,  whom  he 
had  aroused,  sided  with  him  and  he  won. 

Mr.  Forbes  was  the  pioneer  among  Boston 
railroad-builders.  His  example  and  his  success 
inspired  many  others,  for  Boston  was  not  lacking 


178  OTHER  PEOPLE'S  MONEY 

then  in  men  who  were  builders,  though  some 
lacked  his  wisdom,  and  some  his  character.  Her 
enterprise  and  capital  constructed,  in  large  part, 
the  Union  Pacific,  the  Atchison,  the  Mexican 
Central,  the  Wisconsin  Central,  and  24  other 
railroads  in  the  West  and  South.  One  by  one 
these  western  and  southern  railroads  passed  out 
of  Boston  control;  the  greater  part  of  them  into 
the  control  of  the  JNIorgan  allies.  Before  the 
Burlington  was  surrendered,  Boston  had  begun 
to  lose  her  dominion,  even,  over  the  railroads  of 
New  England.  In  1900  the  Boston  &  Albany 
was  leased  to  the  New  York  Central, — a  Morgan 
property;  and  a  few  years  later,  another  Morgan 
railroad — the  New  Haven — acquired  control  of 
nearly  every  other  transportation  line  in  New 
England.  Now  nothing  is  left  of  Boston's 
railroad  dominion  in  the  West  and  South, 
except  the  Eastern  Kentucky  Railroad — a  line 
36  miles  long;  and  her  control  of  the  railroads  of 
Massachusetts  is  limited  to  the  Grafton  &  Upton 
with  19  miles  of  line  and  the  Boston,  Revere 
Beach  &  Lynn, — a  passenger  road  13  miles  long. 

THE    NEW   HAVEN   MONOPOLY 

The  rise  of  the  New  Haven  Monopoly  presents 
another  striking  example  of  combination  as  a 


A  CURSE  OF  BIGNESS  179 

developer  of  financial  concentration;  and  it 
illustrates  also  the  use  to  which  ''large  security 
issues"  are  put. 

In  1892,  when  Mr.  Morgan  entered  the  New 
Haven  directorate,  it  was  a  very  prosperous 
little  railroad  with  capital  liabilities  of  $25,000,000 
paying  10  per  cent,  dividends,  and  operating 
508  miles  of  line.  By  1899  the  capitalization 
had  grown  to  $80,477,600,  but  the  aggregate 
mileage  had  also  grown  (mainly  through  merger 
or  leases  of  other  lines)  to  2017.  Fourteen  years 
later,  in  1913,  when  Mr.  Morgan  died  and  Mr. 
Mellen  resigned,  the  mileage  was  1997,  just 
20  miles  less  than  in  1899;  but  the  capital  lia- 
bilities had  increased  to  $425,935,000.  Of  course 
the  business  of  the  railroad  had  grown  largely 
in  those  fourteen  years;  the  road-bed  was  im- 
proved, bridges  built,  additional  tracks  added, 
and  much  equipment  purchased;  and  for  all  this, 
new  capital  was  needed;  and  additional  issues 
were  needed,  also,  because  the  company  paid 
out  in  dividends  more  than  it  earned.  But 
of  the  capital  increase,  over  $200,000,000  was 
expended  in  the  acquisition  of  the  stock  or  other 
securities  of  some  121  other  railroads,  steam- 
ships, street  railway-,  electric-light-,  gas-  and 
water-companies.     It  was  these  outside  proper- 


180         OTHER  PEOPLE'S  MONEY 

ties,  which  made  necessary  the  much  discussed 
$67,000,000,  6  per  cent,  bond  issue,  as  well  as 
other  large  and  expensive  security  issues.  For 
in  these  fourteen  years  the  improvements  on 
the  railroad  including  new  equipment  have  cost, 
on  the  average,  only  $10,000,000  a  year. 

THE  NEW  HAVEN   BANKERS 

Few,  if  any,  of  those  121  companies  which  the 
New  Haven  acquired  had,  prior  to  their  absorp- 
tion by  it,  been  financed  by  J.  P.  Morgan  & 
Co.  The  needs  of  the  Boston  &  Maine  and 
Maine  Central — the  largest  group — had,  for 
generations,  been  met  mainly  through  their 
own  stockholders  or  through  Boston  banking 
houses.  No  investment  banker  had  been  a 
member  of  the  Board  of  Directors  of  either  of 
those  companies.  The  New  York,  Ontario  & 
Western — the  next  largest  of  the  acquired  rail- 
roads— had  been  financed  in  New  York,  but  by 
persons  apparently  entirely  independent  of  the 
Morgan  allies.  The  smaller  Connecticut  rail- 
roads, now  combined  in  the  Central  New  Eng- 
land, had  been  financed  mainly  in  Connecticut, 
or  by  independent  New  York  bankers.  The 
financing  of  the  street  railway  companies  had 
been   done  largely   l)y   individual  financiers,   or 


A  CURSE  OF  BIGNESS  181 

by  small  and  independent  bankers  in  the  states 
or  cities  where  the  companies  operate.  Some  of 
the  steamship  companies  had  been  financed  by 
their  owners,  some  through  independent  bankers. 
As  the  result  of  the  absorption  of  these  121  com- 
panies into  the  New  Haven  system,  the  financing 
of  all  these  railroads,  steamship  companies, 
street  railways,  and  other  corporations,  was 
made  tributary  to  J.  P.  Morgan  &  Co.;  and  the 
independent  bankers  were  eliminated  or  became 
satellites.  And  this  financial  concentration  was 
proceeded  with,  although  practically  every  one 
of  these  121  companies  was  acquired  by  the  New 
Haven  in  violation  either  of  the  state  or  federal 
law,  or  of  both.  Enforcement  of  the  Sherman 
Act  will  doubtless  result  in  dissolving  this 
unwieldy  illegal  combination. 

THE    COAL  MONOPOLY 

Proof  of  the  ''cooperation"  of  the  anthracite 
railroads  is  furnished  by  the  ubiquitous  presence 
of  George  F.  Baker  on  the  Board  of  Directors 
of  the  Reading,  the  Jersey  Central,  the  Lacka- 
wanna, the  Lehigh,  the  Erie,  and  the  New  York, 
Susquehanna  &  Western  railroads,  which  to- 
gether control  nearly  all  the  unmined  anthracite 
as  well  as  the  actual  tonnage.     These  roads  have 


182         OTHER  PEOPLE'S  MONEY 

been  an  important  factor  in  the  development  of 
the  Money  Trust.  They  are  charged  by  the  De- 
partment of  Justice  with  fundamental  violations 
both  of  the  Sherman  Law  and  of  the  Commodity 
clause  of  the  Hepburn  Act,  which  prohibits  a 
railroad  from  carrying,  in  interstate  trade,  any 
commodity  in  which  it  has  an  interest,  direct  or 
indirect.  Nearly  every  large  issue  of  securities 
made  in  the  last  14  years  by  any  of  these  rail- 
roads (except  the  Erie),  has  been  in  connection 
with  some  act  of  combination.  The  combina- 
tion of  the  anthracite  railroads  to  suppress  the 
construction,  through  the  Temple  Iron  Company, 
of  a  competing  coal  road,  has  already  been  de- 
clared illegal  by  the  Supreme  Court  of  the  United 
States.  And  in  the  bituminous  coal  field — the 
Kanawha  District — the  United  States  Circuit 
Court  of  Appeals  has  recently  decreed  that  a 
similar  combination  by  the  Lake  Shore,  the 
Chesapeake  &  Ohio,  and  the  Hocking  Valley, 
be  dissolved. 

OTHER   RAILROAD    COMBINATIONS 

The  cases  of  the  Union  Pacific  and  of  the  New 
Haven  are  typical — not  excoi)tional.  Our  rail- 
road history  presents  numerous  instances  of  large 
security  issues  made  wholly  or  mainly  to  effect 


A  CURSE  OF  BIGNESS  183 

combinations.  Some  of  these  combinations  have 
been  proper  as  a  means  of  securing  natural 
feeders  or  extensions  of  main  lines.  But  far  more 
of  them  have  been  dictated  by  the  desire  to 
suppress  active  or  potential  competition;  or  by- 
personal  ambition  or  greed;  or  by  the  mistaken 
belief  that  efficiency  grows  with  size. 

Thus  the  monstrous  combination  of  the  Rock 
Island  and  the  St.  Louis  and  San  Francisco  with 
over  14,000  miles  of  line  is  recognized  now  to 
have  been  obviously  inefficient.  It  was  severed 
voluntarily;  but,  had  it  not  been,  must  have 
crumbled  soon  from  inherent  defects,  if  not  as  a 
result  of  proceedings  under  the  Sherman  law. 
Both  systems  are  suffering  now  from  the  effects 
of  this  unwise  combination;  the  Frisco,  itself 
greatly  overcombined,  has  paid  the  penalty  in 
receivership.  The  Rock  Island — a  name  once 
expressive  of  railroad  efficiency  and  stability — • 
has,  through  its  excessive  recapitalizations  and 
combinations,  become  a  football  of  speculators, 
and  a  source  of  great  apprehension  to  confiding 
investors.  The  combination  of  the  Cincinnati, 
Hamilton  and  Dayton,  and  the  Pdre  Marquette 
led  to  several  receiverships. 

There  are,  of  course,  other  combinations 
which  have  not  been  disastrous  to  the  owners  of 


184  OTHER  PEOPLE'S  MONEY 

the  railroads.  But  the  fact  that  a  railroad 
combination  has  not  been  disastrous  does  not 
necessarily  justify  it.  The  evil  of  the  concentra- 
tion of  power  is  obvious;  and  as  combination 
necessarily  involves  such  concentration  of  power, 
the  burden  of  justifying  a  combination  should 
be  placed  upon  those  who  seek  to  effect  it. 

For  instance,  what  public  good  has  been 
subserved  by  allowing  the  Atlantic  Coast  Line 
Railroad  Company  to  issue  S50,000,000  of  securi- 
ties to  acquire  control  of  the  Louisville  &  Nash- 
ville Railroad — a  widely  extended,  self-sufficient 
system  of  5000  miles,  which,  under  the  wise 
management  of  President  ^Milton  H.  Smith  had 
prospered  continuously  for  many  years  before  the 
acquisition;  and  which  has  gross  earnings  nearly 
twice  as  large  as  those  of  the  Atlantic  Coast  Line. 
The  legality  of  this  combination  has  been 
recently  challenged  by  Senator  Lea;  and  an 
investigation  by  the  Interstate  Commerce  Com- 
mission has  been  ordered. 

THE    PENNSYLVANIA 

The  reports  from  the  Pennsylvania  suggest  the 
inquiry  whether  even  this  generally  well-managed 
railroad  is  not  suffering  from  excessive  bigness. 
After   1898  it,   too,   bought,   in   large  amounts, 


A  CURSE  OF  BIGNESS  185 

stocks  in  other  railroads,  including  the  Chesa- 
peake &  Ohio,  the  Baltimore  &  Ohio,  and  the 
Norfolk  &  Western.  In  1906  it  sold  all  its 
Chesapeake  &  Ohio  stock,  and  a  majority  of  its 
Baltimore  &  Ohio  and  Norfolk  &  Western 
holdings.  Later  it  reversed  its  policy  and  re- 
sumed stock  purchases,  acquiring,  among  others, 
more  Norfolk  &  Western  and  New  York,  New 
Haven  &  Hartford;  and  on  Dec.  31,  1912,  held 
securities  valued  at  $331,909,154.32;  of  which, 
however,  a  large  part  represents  Pennsylvania 
System  securities.  These  securities  (mostly 
stocks)  constitute  about  one-third  of  the  total 
assets  of  the  Pennsylvania  Railroad.  The  in- 
come on  these  securities  in  1912  averaged  only 
4.30  per  cent,  on  their  valuation,  while  the  Penn- 
sylvania paid  6  per  cent,  on  its  stock.  But  the 
cost  of  carrying  these  foreign  stocks  is  not  limited 
to  the  difference  between  this  income  and  outgo. 
To  raise  money  on  these  stocks  the  Pennsylvania 
had  to  issue  its  own  securities;  and  there  is  such 
a  thing  as  an  over-supply  even  of  Pennsylvania 
securities.  Over-supply  of  any  stock  depresses 
market  values,  and  increases  the  cost  to  the  Pen- 
nsylvania of  raising  new  money.  Recently  came 
the  welcome  announcement  of  the  management 
that  it  will  dispose  of  its  stocks  in  the  anthracite 


186  OTHER  PEOPLE'S  MONEY 

coal  mines;  and  it  is  intimated  that  it  will  divest 
itself  also  of  other  holdings  in  companies  (like 
the  Cambria  Steel  Company)  extraneous  to  the 
business  of  railroading.  This  policy  should  be 
extended  to  include  the  disposition  also  of  all 
stock  in  other  railroads  (like  the  Norfolk  &  West- 
ern, the  Southern  Pacific  and  the  New  Haven) 
which  are  not  a  part  of  the  Pennsylvania  System. 

RECOMMENDATIONS 

Six  years  ago  the  Interstate  Commerce  Com- 
mission, after  investigating  the  Union  Pacific 
transaction  above  referred  to,  recommended 
legislation  to  remedy  the  evils  there  disclosed. 
Upon  concluding  recently  its  investigation  of  the 
New  Haven,  the  Commission  repeated  and 
amplified  those  recommendations,  saying: 

"No  student  of  the  railroad  problem  can 
doubt  that  a  most  prolific  source  of  financial 
disaster  and  complication  to  railroads  in  the  past 
has  been  the  desire  and  ability  of  railroad  man- 
agers to  engage  in  enterprises  outside  the  legiti- 
mate operation  of  their  railroads,  especially  by 
the  acquisition  of  other  railroads  and  their 
securities.  The  evil  which  results,  first,  to  the 
investing  public,  and,  finally,  to  the  general 
public,  cannot  be  corrected  after  the  transaction 


A  CURSE  OF  BIGNESS  187 

has  taken  place;  it  can  be  easily  and  effectively 
prohibited.  In  our  opinion  the  following  propo- 
sitions lie  at  the  foundation  of  all  adequate  regu- 
lation of  interstate  railroads: 

1.  Every  interstate  railroad  should  be  pro- 
hibited from  spending  money  or  incurring  liability 
or  acquiring  property  not  in  the  operation  of  its 
railroad  or  in  the  legitimate  improvement,  ex- 
tension, or  development  of  that  railroad. 

2.  No  interstate  railroad  should  be  permitted  to 
lease  or  purchase  any  other  railroad,  nor  to  acquire 
the  stocks  or  securities  of  any  other  railroad, 
nor  to  guarantee  the  same,  directl  or  indirectly, 
without  the  approval  of  the  federal  government. 

3.  No  stocks  or  bonds  should  be  issued  by  an 
interstate  railroad  except  for  the  purposes  sanc- 
tioned in  the  two  preceding  paragraphs,  and 
none  should  be  issued  without  the  approval  of  the 
federal  government. 

It  may  be  unwise  to  attempt  to  specify  the 
price  at  which  and  the  manner  in  which  railroad 
stocks  and  securities  shall  be  disposed  of;  but  it  is 
easy  and  safe  to  define  the  purpose  for  which  they 
may  be  issued  and  to  confine  the  expenditure  of 
the  money  realized  to  that  purpose." 

These  recommendations  are  in  substantial 
accord    with    those    adopted    by    the    National 


188         OTHER  PEOPLE'S  MONEY 

Association  of  Railway  Commissioners.  They 
should  be  enacted  into  law.  And  they  should  be 
supplemented  by  amendments  of  the  Commodity 
Clause  of  the  Hepburn  Act,  so  that: 

1.  Railroads  will  be  effectually  prohibited  from 
owning  stock  in  corporations  whose  products 
they  transport; 

2.  Such  corporations  will  be  prohibited  from 
owning  important  stockholdings  in  railroads;  and 

3.  Holding  companies  will  be  prohibited  from 
controlling,  as  does  the  Reading,  both  a  rail- 
road and  corporations  whose  commodities  it 
transports. 

If  laws  such  as  these  are  enacted  and  duly 
enforced,  we  shall  be  protected  from  a  recurrence 
of  tragedies  like  the  New  Haven,  of  domestic 
scandals  like  the  Chicago  and  Alton,  and  of 
international  ones  like  the  Frisco.  We  shall  also 
escape  from  that  inefficiency  which  is  attendant 
upon  excessive  size.  But  what  is  far  more  im- 
portant, we  shall,  by  such  legislation,  remove  a 
potent  factor  in  financial  concentration.  De- 
centralization will  begin.  The  liberated  smaller 
units  will  find  no  difficulty  in  financing  their 
needs  without  bowing  the  knee  to  money  lords. 
And  a  long  step  will  have  been  taken  toward 
attainment  of  the  New  Freedom. 


CHAPTER  IX 
THE  FAILURE  OF  BANKER-MANAGEMENT 

There  is  not  one  moral,  but  many,  to  be  drawn 
from  the  Decline  of  the  New  Haven  and  the  Fall 
of  Mellen.  That  history  offers  texts  for  many 
sermons.  It  illustrates  the  Evils  of  Monopoly, 
the  Curse  of  Bigness,  the  Futility  of  Lying,  and 
the  Pitfalls  of  Law-Breaking.  But  perhaps  the 
most  impressive  lesson  that  it  should  teach  to 
investors  is  the  failure  of  banker-management. 

BANKER   CONTROL 

For  years  J.  P.  Morgan  &  Co.  were  the  fis- 
cal agents  of  the  New  Haven.  For  years  Mr. 
Morgan  was  the  director  of  the  Company.  He 
gave  to  that  property  probably  closer  personal 
attention  than  to  any  other  of  his  many  interests. 
Stockholders'  meetings  are  rarely  interesting  or 
important;  and  few  indeed  must  have  been  the 
occasions  when  Mr.  Morgan  attended  any  stock- 
holders' meeting  of  other  companies  in  which  he 
was  a  director.     But  it  was  his  habit,  when  in 

189 


190         OTHER  PEOPLE'S  MONEY 

America,  to  be  present  at  meetings  of  the  New 
Haven.  In  1907,  when  the  policy  of  monopolistic 
expansion  was  first  challenged,  and  again  at  the 
meeting  in  1909  (after  Massachusetts  had  un- 
wisely accorded  its  sanction  to  the  Boston  & 
Maine  merger),  Mr.  IMorgan  himself  moved 
the  large  increases  of  stock  which  were  unani- 
mously voted.  Of  course,  he  attended  the 
important  directors'  meetings.  His  will  was 
law.  President  Mellen  indicated  this  in  his 
statement  before  Interstate  Commerce  Com- 
missioner Prouty,  while  discussing  the  New 
York,  Westchester  &  Boston — the  railroad  with- 
out a  terminal  in  New  York,  which  cost  the 
New  Haven  $1,500,000  a  mile  to  acquire,  and 
was  then  costing  it,  in  operating  deficits  and 
interest  charges,  $100,000  a  month  to  run: 

"I  am  in  a  very  embarrassing  position,  Mr. 
Commissioner,  regarding  the  New  York,  West- 
chester &  Boston.  I  have  never  been  enthusias- 
tic or  at  all  optimistic  of  its  being  a  good  invest- 
ment for  our  company  in  the  present,  or  in  the 
immediate  future;  but  people  in  whom  I  had 
greater  confidence  than  1  have  in  myself  thought 
it  was  wise  and  desirable;  I  yielded  my  judgment; 
indeed,  I  don't  know  that  it  would  have  made 
much  difTerence  whether  I  yielded  or  not." 


BANKER-MANAGEMENT  191 

THE   bankers'    responsibility 

Bankers  are  credited  with  being  a  conservative 
force  in  the  community.  The  tradition  hngers 
that  they  are  preeminently  "safe  and  sane."  And 
yet,  the  most  grievous  fault  of  this  banker- 
managed  railroad  has  been  its  financial  reckless- 
ness— a  fault  that  has  already  brought  heavy 
losses  to  many  thousands  of  small  investors 
throughout  New  England  for  whom  bankers  are 
supposed  to  be  natural  guardians.  In  a  com- 
munity where  its  railroad  stocks  have  for  gen- 
erations been  deemed  absolutely  safe  invest- 
ments, the  passing  of  the  New  Haven  and  of  the 
Boston  &  Maine  dividends  after  an  unbroken 
dividend  record  of  generations  comes  as  a 
disaster. 

This  disaster  is  due  mainly  to  enterprises  out- 
side the  legitimate  operation  of  these  railroads; 
for  no  railroad  company  has  equaled  the  New 
Haven  in  the  quantity  and  extravagance  of  its 
outside  enterprises.  But  it  must  be  remembered, 
that  neither  the  president  of  the  New  Haven  nor 
any  other  railroad  manager  could  engage  in  such 
transactions  without  the  sanction  of  the  Board 
of  Directors.  It  is  the  directors,  not  Mr.  Mellen, 
who  should  bear  the  responsibility. 


192         OTHER  PEOPLE'S  MONEY 

Close  scrutiny  of  the  transactions  discloses  no 
justification.  On  the  contrary,  scrutiny  serves 
only  to  make  more  clear  the  gravity  of  the  errors 
committed.  Not  merely  were  recklessly  ex- 
travagant acquisitions  made  in  mad  pursuit  of 
monopoly;  but  the  financial  judgment,  the  finan- 
ciering itself,  was  conspicuously  bad.  To  pay 
for  property  several  times  what  it  is  worth,  to 
engage  in  grossly  unwise  enterprises,  are  errors 
of  which  no  conservative  directors  should  be 
found  guilty;  for  perhaps  the  most  important 
function  of  directors  is  to  test  the  conclusions 
and  curb  by  calm  counsel  the  excessive  zeal  of 
too  ambitious  managers.  But  while  we  have  no 
right  to  expect  from  bankers  exceptionally  good 
judgment  in  ordinary  business  matters;  we  do 
have  a  right  to  expect  from  them  prudence, 
reasonably  good  financiering,  and  insistence  upon 
straightforward  accounting.  And  it  is  just  the 
lack  of  these  qualities  in  the  New  Haven  man- 
agement to  which  the  severe  criticism  of  the 
Interstate  Commerce  Commission  is  particularly 
directed. 

Conmissioner  Prouty  calls  attention  to  the 
vast  increase  of  capitalization.  During  the  nine 
years  beginning  July  1,  1903,  the  capital  of  the 
New  York,   New  Haven  &   Hartford  Railroad 


BANKER-MANAGEMENT  193 

Company  itself  increased  from  $93,000,000  to 
about  $417,000,000  (excluding  premiums).  That 
fact  alone  would  not  convict  the  management 
of  reckless  financiering;  but  the  fact  that  so 
little  of  the  new  capital  was  represented  by  stock 
might  well  raise  a  question  as  to  its  conservative- 
ness.  For  the  indebtedness  (including  guaran- 
ties) was  increased  over  twenty  times  (from 
about  $14,000,000  to  $300,000,000),  while  the 
stock  outstanding  in  the  hands  of  the  public 
was  not  doubled  ($80,000,000  to  $158,000,000). 
Still,  in  these  days  of  large  things,  even  such 
growth  of  corporate  liabilities  might  be  con- 
sistent with  "safe  and  sane  management." 

But  what  can  be  said  in  defense  of  the  finan- 
cial judgment  of  the  banker-management  under 
which  these  two  railroads  find  themselves  con- 
fronted, in  the  fateful  year  1913,  with  a  most 
disquieting  floating  indebtedness?  On  March 
31,  the  New  Haven  had  outstanding  $43,000,000 
in  short-time  notes;  the  Boston  &  Maine  had 
then  outstanding  $24,500,000,  which  have  been 
increased  since  to  $27,000,000;  and  additional 
notes  have  been  issued  by  several  of  its  sub- 
sidiary lines.  Mainly  to  meet  its  share  of  these 
loans,  the  New  Haven,  which  before  its  great 
expansion  could  sell  at  par  3  1/2  per  cent,  bonds 


194         OTHER  PEOPLE'S  MONEY 

convertible  into  stock  at  S150  a  share,  was  so 
eager  to  issue  at  par  $67,500,000  of  its  6  per 
cent.  20-3'ear  bonds  convertible  into  stock  as  to 
agree  to  pay  J.  P.  ]M organ  &  Co.  a  2  1/2  per 
cent.  underwTiting  commission.  True,  money 
was  ''tight"  then.  But  is  it  not  very  bad 
financiering  to  be  so  unprepared  for  the  "tight" 
money  market  which  had  been  long  expected? 
Indeed,  the  New  Haven's  management,  particu- 
larly, ought  to  have  avoided  such  an  error;  for 
it  committed  a  similar  one  in  the  "tight"  money 
market  of  1907-1908,  when  it  had  to  sell  at  par 
§39,000,000  of  its  6  per  cent.  40-year  bonds. 

These  huge  short-time  borrowings  of  the  Sys- 
tem were  not  due  to  unexpected  emergencies  or 
to  their  monetary  conditions.  They  were  of 
gradual  growth.  On  June  30,  1910,  the  two 
companies  owed  in  short-term  notes  only  $10,- 
180,364;  by  June  30,  1911,  the  amount  had  grown 
to  $30,759,959;  by  June  30,  1912,  to  $45,395,000; 
and  in  1913  to  over  $70,000,000.  Of  course  the 
rate  of  interest  on  the  loans  increased  also 
very  largely.  And  these  loans  were  incurred 
unnecessarily.  They  represent,  in  the  main, 
not  improvements  on  the  New  Haven  or  on  the 
Boston  &  Maine  Railroads,  but  money  borrowed 
either  to  pay  for  stocks  in  other  companies  which 


BANKER-MANAGEMENT  195 

these  companies  could  not  afford  to  buy,  or  to 
pay  dividends  which  had  not  been  earned. 

In  five  years  out  of  the  last  six  the  New  Haven 
Railroad  has,  on  its  own  showing,  paid  dividends 
in  excess  of  the  year's  earnings;  and  the  annual 
deficits  disclosed  would  have  been  much  larger 
if  proper  charges  for  depreciation  of  equipment 
and  of  steamships  had  been  made.  In  each  of  the 
last  three  years,  during  which  the  New  Haven 
had  absolute  control  of  the  Boston  &  Maine, 
the  latter  paid  out  in  dividends  so  much  in 
excess  of  earnings  that  before  April,  1913,  the 
surplus  accumulated  in  earlier  years  had  been 
converted  into  a  deficit. 

Surely  these  facts  show,  at  least,  an  extra- 
ordinary lack  of  financial  prudence. 

WHY  BANKER-MANAGEMENT   FAILED 

Now,  how  can  the  failure  of  the  banker- 
management  of  the  New  Haven  be  explained? 

A  few  have  questioned  the  ability;  a  few  the 
integrity  of  the  bankers.  Commissioner  Prouty 
attributed  the  mistakes  made  to  the  Company's 
pursuit  of  a  transportation  monopoly. 

''The  reason,"  says  he,  "is  as  apparent  as  the 
fact  itself.  The  present  management  of  that 
Company  started  out  with  the  purpose  of  con- 


196         OTHER  PEOPLE'S  MONEY 

trolling  the  transportation  facilities  of  New 
England.  In  the  accomplishment  of  that  pur- 
pose it  bought  what  must  be  had  and  paid  what 
must  be  paid.  To  this  purpose  and  its  attempted 
execution  can  be  traced  every  one  of  these  finan- 
cial misfortunes  and  derelictions." 

But  it  still  remains  to  find  the  cause  of  the 
bad  judgment  exercised  by  the  eminent  banker- 
management  in  entering  upon  and  in  carrying 
out  the  policy  of  monopoly.  For  there  were  as 
grave  errors  in  the  execution  of  the  policy  of 
monopoly  as  in  its  adoption.  Indeed,  it  was  the 
aggregation  of  important  errors  of  detail  which 
compelled  first  the  reduction,  then  the  passing 
of  dividends  and  which  ultimately  impaired  the 
Company's  credit. 

The  failure  of  the  banker-management  of  the 
New  Haven  cannot  be  explained  as  the  shortr 
comings  of  individuals.  The  failure  was  not 
accidental.  It  was  not  exceptional.  It  was 
the  natural  result  of  confusing  the  functions  of 
banker  and  business  man. 

UNDIVIDED    LOYALTY 

The  banker  should  be  detached  from  the  busi- 
ness for  which  he  performs  the  banking  service. 
This  detachment  is  desirable,  in  the  first  place, 


BANKER-MANAGEMENT  197 

in  order  to  avoid  conflict  of  interest.  The  re- 
lation of  banker-directors  to  corporations  which 
they  finance  has  been  a  subject  of  just  criti- 
cism. Their  conflicting  interests  necessarily  pre- 
vent single-minded  devotion  to  the  corporation. 
When  a  banker-director  of  a  railroad  decides  as 
railroad  man  that  it  shall  issue  securities,  and 
then  sells  them  to  himself  as  banker,  fixing  the 
price  at  which  they  are  to  be  taken,  there  is 
necessarily  grave  danger  that  the  interests  of 
the  railroad  may  suffer — suffer  both  through  is- 
suing of  securities  which  ought  not  to  be  issued, 
and  from  selling  them  at  a  price  less  favorable 
to  the  company  than  should  have  been  obtained. 
For  it  is  ordinarily  impossible  for  a  banker- 
director  to  judge  impartially  between  the  cor- 
poration and  himself.  Even  if  he  succeeded  in 
being  impartial,  the  relation  would  not  conduce 
to  the  best  interests  of  the  company.  The 
best  bargains  are  made  when  buyer  and  seller 
are  represented  by  different  persons. 

DETACHMENT   AN    ESSENTIAL 

But  the  objection  to  banker-management  does 
not  rest  wholly,  or  perhaps  mainly,  upon  the 
importance  of  avoiding  divided  loyalty.  A  com- 
plete detachment  of  the  banker  from  the  corpo- 


198         OTHER  PEOPLE'S  MONEY 

ration  is  necessary  in  order  to  secure  for  the 
railroad  the  benefit  of  the  clearest  financial 
judgment;  for  the  banker's  judgment  will  be 
necessarily  clouded  by  participation  in  the 
management  or  by  ultimate  responsibility  for 
the  policy  actually  pursued.  It  is  outside  finan- 
cial advice  which  the  railroad  needs. 

Long  ago  it  was  recognized  that  "a  man  who 
is  his  own  lawyer  has  a  fool  for  a  client."  The 
essential  reason  for  this  is  that  soundness  of 
judgment  is  easily  obscured  by  self-interest. 
Similarly,  it  is  not  the  proper  function  of  the 
banker  to  construct,  purchase,  or  operate  rail- 
roads, or  to  engage  in  industrial  enterprises. 
The  proper  function  of  the  banker  is  to  give  to 
or  to  withhold  credit  from  other  concerns;  to 
purchase  or  to  refuse  to  purchase  securities  from 
other  concerns;  and  to  sell  securities  to  other 
customers.  The  proper  exercise  of  this  function 
demands  that  the  banker  should  be  wholly  de- 
tached from  the  concern  whose  credit  or  securi- 
ties are  under  consideration.  His  decision  to 
grant  or  to  withhold  credit,  to  purchase  or  not 
to  purchase  securities,  involves  passing  judg- 
ment on  the  efficiency  of  the  management  or  the 
soundness  of  the  enterprise;  and  he  ought  not 
to  occupy  a  position  where  in  so  doing  he  is 


BANKER-MANAGEMENT  199 

passing  judgment  on  himself.  Of  course  de- 
tachment does  not  imply  lack  of  knowledge. 
The  banker  should  act  only  with  full  knowledge, 
just  as  a  lawyer  should  act  only  with  full  knowl- 
edge. The  banker  who  undertakes  to  make 
loans  to  or  purchase  securities  from  a  railroad 
for  sale  to  his  other  customers  ought  to  have  aa 
full  knowledge  of  its  affairs  as  does  its  legal 
adviser.  But  the  banker  should  not  be,  in  any 
sense,  his  own  client.  He  should  not,  in  the  ca- 
pacity of  banker,  pass  judgment  upon  the  wisdom 
of  his  own  plans  or  acts  as  railroad  man. 

Such  a  detached  attitude  on  the  part  of  the 
banker  is  demanded  also  in  the  interest  of  his 
other  customers — the  purchasers  of  corporate 
securities.  The  investment  banker  stands  to- 
ward a  large  part  of  his  customers  in  a  posi- 
tion of  trust,  which  should  be  fully  recognized. 
The  small  investors,  particularly  the  women,  who 
are  holding  an  ever-increasing  proportion  of  our 
corporate  securities,  commonly  buy  on  the 
recommendation  of  their  bankers.  The  small 
investors  do  not,  and  in  most  cases  cannot,  as- 
certain for  themselves  the  facts  on  which  to  base 
a  proper  judgment  as  to  the  soundness  of  securi- 
ties offered.  And  even  if  these  investors  were 
furnished  with  the  facts,  they  lack  the  business 


200  OTHER  PEOPLE'S  MONEY 

experience  essential  to  forming  a  proper  judg- 
ment. Such  investors  need  and  are  entitled  to 
have  the  bankers'  advice,  and  obviously  their 
unbiased  advice;  and  the  advice  cannot  be  un- 
biased where  the  banker,  as  part  of  the  corpora- 
tion's management,  has  participated  in  the  crea- 
tion of  the  securities  which  are  the  subject  of 
sale  to  the  investor. 

Is  it  conceivable  that  the  great  house  of  Mor- 
gan would  have  aided  in  providing  the  New 
Haven  with  the  hundreds  of  millions  so  un- 
wisely expended,  if  its  judgment  had  not  been 
clouded  by  participation  in  the  New  Haven's 
management? 


CHAPTER  X 
THE  INEFFICIENCY  OF  THE  OLIGARCHS 

We  must  break  the  Money  Trust  or  the  Money- 
Trust  will  break  us. 

The  Interstate  Commerce  Commission  said 
in  its  report  on  the  most  disastrous  of  the  recent 
wrecks  on  the  New  Haven  Railroad: 

''On  this  directorate  were  and  are  men  whom 
the  confiding  public  recognize  as  magicians  in 
the  art  of  finance,  and  wizards  in  the  construc- 
tion, operation,  and  consolidation  of  great  sys- 
tems of  railroads.  The  public  therefore  rested 
secure  that  with  the  knowledge  of  the  railroad 
art  possessed  by  such  men  investments  and 
travel  should  both  be  safe.  Experience  has 
shown  that  this  reliance  of  the  public  was  not 
justified  as  to  either  finance  or  safety." 

This  failure  of  banker-management  is  not 
surprising.  The  surprise  is  that  men  should 
have  supposed  it  would  succeed.  For  banker- 
management  contravenes  the  fundamental  laws 

201 


202         OTHER  PEOPLE'S  MONEY 

of  human  limitations:  First,  that  no  man  can 
serve  two  masters;  second,  that  a  man  cannot 
at   the  same   time  do  many   things  well. 

SEEMING    SUCCESSES 

There  are  numerous  seeming  exceptions  to 
these  rules;  and  a  relatively  few  real  ones. 
Of  course,  many  banker-managed  properties 
have  been  prosperous;  some  for  a  long  time, 
at  the  expense  of  the  public;  some  for  a  shorter 
time,  because  of  the  impetus  attained  before 
they  were  banker-managed.  It  is  not  difficult 
to  have  a  large  net  income,  where  one  has  the 
field  to  oneself,  has  all  the  advantages  privilege 
can  give,  and  may  "charge  all  the  traffic  will 
bear."  And  even  in  competitive  business  the 
success  of  a  long-established,  well-organized  busi- 
ness with  a  widely  extended  good-will,  must  con- 
tinue for  a  considerable  time;  especially  if  but- 
tressed by  intertwined  relations  constantly  giving 
it  the  preference  over  competitors.  The  real 
test  of  efficiency  comes  when  success  has  to  be 
struggled  for;  when  natural  or  legal  conditions 
limit  the  charges  which  may  be  made  for  the 
goods  sold  or  service  rendered.  Our  banker- 
managed  railroads  have  recently  been  subjected 
to  such  a  test,  and  they  have  failed  to  pass  it. 


THE  OLIGARCH  INEFFICIENT     203 

"It  is  only,"  says  Goethe,  "when  working  within 
limitations,  that  the  master  is  disclosed." 

WHY   OLIGARCHY   FAILS 

Banker-management  fails,  partly  because  the 
private  interest  destroys  soundness  of  judgment 
and  undermines  loyalty.  It  fails  partly,  also, 
because  banker  directors  are  led  by  their  occu- 
pation (and  often  even  by  the  mere  fact  of  their 
location  remote  from  the  operated  properties) 
to  apply  a  false  test  in  making  their  decisions. 
Prominent  in  the  banker-director  mind  is  always 
this  thought:  *'What  will  be  the  probable  effect 
of  our  action  upon  the  market  value  of  the  com- 
pany's stock  and  bonds,  or,  indeed,  generally 
upon  stock  exchange  values?"  The  stock  market 
is  so  much  a  part  of  the  investment-banker's 
life,  that  he  cannot  help  being  affected  by  this 
consideration,  however  disinterested  he  may  be. 
The  stock  market  is  sensitive.  Facts  are  often 
misinterpreted  "by  the  street"  or  by  investors. 
And  with  the  best  of  intentions,  directors  sus- 
ceptible to  such  influences  are  led  to  unwise 
decisions  in  the  effort  to  prevent  misinterpreta- 
tions. Thus,  expenditures  necessary  for  main- 
tenance, or  for  the  ultimate  good  of  a  property 
are  often  deferred  by  banker-directors,  because 


204         OTHER  PEOPLE'S  MONEY 

of  the  belief  that  the  making  of  them  now, 
would  (by  showing  smaller  net  earnings),  create 
a  bad,  and  even  false,  impression  on  the  market. 
Dividends  are  paid  which  should  not  be,  because 
of  the  efifect  which  it  is  believed  reduction  or 
suspension  would  have  upon  the  market  value  of 
the  company's  securities.  To  excerise  a  sound 
judgment  in  the  difficult  affairs  of  business  is, 
at  best,  a  delicate  operation.  And  no  man  can 
successfully  perform  that  function  whose  mind 
is  diverted,  however  innocently,  from  the  study 
of,  "what  is  best  in  the  long  run  for  the  company 
of  which  I  am  director?''  The  banker-director 
is  peculiarly  liable  to  such  distortion  of  judgment 
by  reason  of  his  occupation  and  his  environment. 
But  there  is  a  further  reason  why,  ordinarily, 
banker-management  must  fail. 

THE    ELEMENT   OF   TIME 

The  banker,  with  his  multiplicity  of  interests, 
cannot  ordinarily  give  the  time  essential  to  proper 
supervision  and  to  acquiring  that  knowledge  of 
the  facts  necessary  to  the  exercise  of  sound  judg- 
ment. The  Century  Dictionary  tells  us  that  a 
Director  is  "one  who  directs;  one  who  guides, 
superintends,  governs  and  manages."  Real  ef- 
ficiency in  any  business  in  which  conditions  are 


THE  OLIGARCH  INEFFICIENT     205 

ever  changing  must  ultimately  depend,  in  large 
measure,  upon  the  correctness  of  the  judgment 
exercised,  almost  from  day  to  day,  on  the  im- 
portant problems  as  they  arise.  And  how  can 
the  leading  bankers,  necessarily  engrossed  in  the 
problems  of  their  own  vast  private  businesses, 
get  time  to  know  and  to  correlate  the  facts  con- 
cerning so  many  other  complex  businesses? 
Besides,  they  start  usually  with  ignorance  of  the 
particular  business  which  they  are  supposed  to 
direct.  When  the  last  paper  was  signed  which 
created  the  Steel  Trust,  one  of  the  lawyers  (as 
Mr.  Perkins  frankly  tells  us)  said:  ''That  signa- 
ture is  the  last  one  necessary  to  put  the  Steel 
industry,  on  a  large  scale,  into  the  hands  of  men 
who  do  not  know  anything  about  it." 

AVOCATIONS  OF  THE  OLIGARCHS 

The  New  Haven  System  is  not  a  railroad,  but 
an  agglomeration  of  a  railroad  plus  121  separate 
corporations,  control  of  which  was  acquired 
by  the  New  Haven  after  that  railroad  attained 
its  full  growth  of  about  2000  miles  of  line.  In 
administering  the  railroad  and  each  of  the  prop- 
erties formerly  managed  through  these  122  sep- 
arate companies,  there  must  arise  from  time  to 
time  difficult  questions  on  which  the  directors 


206         OTHER  PEOPLE'S  MONEY 

should  pass  judgment.  The  real  managing  di- 
rectors of  the  New  Haven  system  during  the 
decade  of  its  decline  were:  J.  Pierpont  Morgan, 
George  F.  Baker,  and  William  Rockefeller. 
Mr.  Morgan  was,  until  his  death  in  1913,  the 
head  of  perhaps  the  largest  banking  house  in 
the  world.  Mr.  Baker  was,  until  1909,  Presi- 
dent and  then  Chairman  of  the  Board  of  Di- 
rectors of  one  of  America's  leading  banks  (the 
First  National  of  New  York),  and  I\Ir.  Rocke- 
feller was,  until  1911,  President  of  the  Standard 
Oil  Company.  Each  was  well  advanced  in 
years.  Yet  each  of  these  men,  besides  the  duties 
of  his  own  vast  business,  and  important  private 
interests,  undertook  to  ''guide,  superintend, 
govern  and  manage,"  not  only  the  New  Haven 
but  also  the  following  other  corporations,  some 
of  which  were  similarly  complex:  Mr.  Mor- 
gan, 48  corporations,  including  40  railroad  cor- 
porations, with  at  least  100  subsidiary  com- 
panies, and  16,000  miles  of  line;  3  banks  and 
trust  or  insurance  companies;  5  industrial  and 
public-service  companies.  Mr.  Baker,  48  cor- 
porations, including  15  railroad  corporations, 
with  at  least  158  subsidiaries,  and  37,400  miles 
of  track;  18  banks,  and  trust  or  insurance  com- 
panies;   15   public-service   corporations   and   in- 


THE  OLIGARCH  INEFFICIENT     207 

dustrial  concerns.  Mr.  Rockefeller,  37  corpora- 
tions, including  23  railroad  corporations  with 
at  least  117  subsidiary  companies,  and  26,400 
miles  of  line;  5  banks,  trust  or  insurance  com- 
panies; 9  public  service  companies  and  industrial 
concerns. 

SUBSTITUTES 

It  has  been  urged  that  in  view  of  the  heavy 
burdens  which  the  leaders  of  finance  assume  in 
directing  Business- America,  we  should  be  patient 
of  error  and  refrain  from  criticism,  lest  the  lead- 
ers be  deterred  from  continuing  to  perform  this 
public  service.  A  very  respectable  Boston  daily 
said  a  few  days  after  Commissioner  McChord's 
report  on  the  North  Haven  wreck: 

"It  is  believed  that  the  New  Haven  pillory 
repeated  with  some  frequency  will  make  the  part 
of  railroad  director  quite  undesirable  and  hard 
to  fill,  and  more  and  more  avoided  by  responsible 
men.  Indeed  it  may  even  become  so  that  men 
will  have  to  be  paid  a  substantial  salary  to  com- 
pensate them  in  some  degree  for  the  risk  involved 
in  being  on  the  board  of  directors." 

But  there  is  no  occasion  for  alarm.  The 
American  people  have  as  little  need  of  oligarchy 


208         OTHER  PEOPLE'S  MONEY 

in  business  as  in  politics.  There  are  thousands 
of  men  in  America  who  could  have  performed 
for  the  New  Haven  stockholders  the  task  of 
one  ''who  guides,  superintends,  governs  and 
manages,"  better  than  did  ]\Ir.  IMorgan.  Mr. 
Baker  and  IVIr.  Rockefeller.  For  though  pos- 
sessing less  native  abilit}^  even  the  average 
business  man  would  have  done  better  than  they, 
because  working  under  proper  conditions.  There 
is  great  strength  in  serving  with  singleness  of 
purpose  one  master  only.  There  is  great  strength 
in  having  time  to  give  to  a  business  the  atten- 
tion which  its  difficult  problems  demand.  And 
tens  of  thousands  more  Americans  could  be  ren- 
dered competent  to  guide  our  important  busi- 
nesses. Liberty  is  the  greatest  developer.  Herod- 
otus tells  us  that  while  the  tyrants  ruled,  the 
Athenians  were  no  better  fighters  than  their 
neighbors;  but  when  freed,  they  immediately 
surpassed  all  others.  If  industrial  democracy — 
true  cooperation — should  be  substituted  for  in- 
dustrial absolutism,  there  would  be  no  lack  of 
industrial  leaders. 

England's  big  business 

England,  too,  has  big  business.     But  her  big 
business  is  the  Cooperative  Wholesale  Society, 


THE  OLIGARCH  INEFFICIENT     209 

with  a  wonderful  story  of  50  years  of  beneficent 
growth.  Its  annual  turnover  is  now  about 
$150,000,000 — an  amount  exceeded  by  the  sales 
of  only  a  few  American  industrials;  an  amount 
larger  than  the  gross  receipts  of  any  Amer- 
ican railroad,  except  the  Pennsylvania  and 
the  New  York  Central  systems.  Its  business 
is  very  diversified,  for  its  purpose  is  to  supply 
the  needs  of  its  members.  It  includes  that  of 
wholesale  dealer,  of  manufacturer,  of  grower, 
of  miner,  of  banker,  of  insurer  and  of  carrier. 
It  operates  the  biggest  flour  mills  and  the  biggest 
shoe  factory  in  all  Great  Britain.  It  manufac- 
tures woolen  cloths,  all  kinds  of  men's,  women's 
and  children's  clothing,  a  dozen  kinds  of  pre- 
pared foods,  and  as  many  household  articles. 
It  operates  creameries.  It  carries  on  every 
branch  of  the  printing  business.  It  is  now 
buying  coal  lands.  It  has  a  bacon  factory  in 
Denmark,  and  a  tallow  and  oil  factory  in  Aus- 
tralia. It  grows  tea  in  Ceylon.  And  through 
all  the  purchasing  done  by  the  Society  runs  this 
general  principle:  Go  direct  to  the  source  of 
production,  whether  at  home  or  abroad,  so  as 
to  save  commissions  of  middlemen  and  agents. 
Accordingly,  it  has  buyers  and  warehouses  in 
the  United  States,  Canada,  Australia,  Spain,  Den- 


210         OTHER  PEOPLE'S  MONEY 

mark  and  Sweden.  It  owns  steamers  plying 
between  Continental  and  English  ports.  It  has 
an  important  banking  depai'tment;  it  insm-es  the 
property  and  person  of  its  members.  Every 
one  of  these  departments  is  conducted  in  com- 
petition with  the  most  efficient  concerns  in  their 
respective  lines  in  Great  Britain.  The  Coopera- 
tive Wholesale  Society  makes  its  purchases,  and 
manufactures  its  products,  in  order  to  supply 
the  1399  local  distributive,  cooperative  societies 
scattered  over  all  England;  but  each  local  society 
is  at  liberty  to  buy  from  the  wholesale  society, 
or  not,  as  it  chooses;  and  they  buy  only  if 
the  Cooperative  Wholesale  sells  at  market  prices. 
This  the  Cooperative  actually  does;  and  it  is 
able  besides  to  return  to  the  local  a  fair  dividend 
on  its  purchases. 

INDUSTRIAL   DEMOCRACY 

Now,  how  are  the  directors  of  this  great  busi- 
ness chosen?  Not  by  England's  leading  bankers, 
or  other  notabilities,  supposed  to  possess  unusual 
wisdom;  but  democratically,  by  all  of  the  people 
interested  in  the  operations  of  the  Society.  And 
the  number  of  such  persons  who  have  directly  or 
indirectly  a  voice  in  the  selection  of  the  directors 
of  the  English  Cooperative  Wholesale  Society  is 


THE  OLIGARCH  INEFFICIENT     211 

2,750,000.  For  the  directors  of  the  Wholesale 
Society  are  elected  by  vote  of  the  delegates  of  the 
1399  retail  societies.  And  the  delegates  of  the 
retail  societies  are,  in  turn,  selected  by  the  mem- 
bers of  the  local  societies; — that  is,  by  the  con- 
sumers, on  the  principle  of  one  man,  one  vote, 
regardless  of  the  amount  of  capital  contributed. 
Note  what  kind  of  men  these  industrial  democrats 
select  to  exercise  executive  control  of  their  vast 
organization.  Not  all-wise  bankers  or  their  dum- 
mies, but  men  who  have  risen  from  the  ranks  of 
cooperation;  men  who,  by  conspicuous  service 
in  the  local  societies  have  won  the  respect  and 
confidence  of  their  fellows.  The  directors  are 
elected  for  one  year  only;  but  a  director  is  rarely 
unseated.  J.  T.  W.  Mitchell  was  president  of 
the  Society  continuously  for  21  years.  Thirty- 
two  directors  are  selected  in  this  manner.  Each 
gives  to  the  business  of  the  Society  his  whole 
time  and  attention;  and  the  aggregate  salaries 
of  the  thirty-two  is  less  than  that  of  many  a 
single  executive  in  American  corporations;  for 
these  directors  of  England's  big  business  serve 
each  for  a  salary  of  about  $1500  a  year. 

The  Cooperative  Wholesale  Society  of  England 
is  the  oldest  and  largest  of  these  institutions. 
But  similar  wholesale  societies  exist  in  15  other 


212         OTHER  PEOPLE'S  MONEY 

countries.  The  Scotch  Society  (which  William 
Maxwell  has  served  most  efficiently  as  President 
for  thirty  years  at  a  salary  never  exceeding  $38 
a  week)  has  a  turn-over  of  more  than  $50,000,000 
a  year. 

A   REMEDY   FOR   TRUSTS 

Albert  Sonnichsen,  General  Secretary  of  the 
Cooperative  League,  tells  in  the  American  Review 
of  Reviews  for  April,  1913,  how  the  Swedish 
Wholesale  Society  curbed  the  Sugar  Trust;  how 
it  crushed  the  Margerine  Combine  (compelling 
it  to  dissolve  after  having  lost  2,300,000  crowns 
in  the  struggle);  and  how  in  Switzerland  the 
Wholesale  Society  forced  the  dissolution  of  the 
Shoe  Manufacturers  Association.  He  tells  also 
this  memorable  incident: 

"Six  years  ago,  at  an  international  congress 
in  Cremona,  Dr.  Hans  Miillcr,  a  Swiss  delegate, 
presented  a  resolution  by  which  an  international 
wholesale  society  should  be  created.  Luigi  Luz- 
zatti,  Italian  Minister  of  State  and  an  ardent 
member  of  the  movement,  was  in  the  chair. 
Those  who  were  present  say  Luzzatti  paused,  his 
eyes  lighted  up,  then,  dramatically  raising  his 
hand,  he  said:  *Dr.  Miiller  proposes  to  the  assem- 


THE  OLIGARCH  INEFFICIENT     213 

bly  a  great  idea — that  of  opposing  to  the  great 
trusts,  the  Rockefellers  of  the  world,  a  world- 
wide cooperative  alliance  which  shall  become  so 
powerful  as  to  crush  the  trusts. ' " 

COOPERATION    IN    AMERICA 

America  has  no  Wholesale  Cooperative  Society- 
able  to  grapple  with  the  trusts.  But  it  has  some 
very  strong  retail  societies,  like  the  Tamarack 
of  Michigan,  which  has  distributed  in  dividends 
to  its  members  $1,144,000  in  23  years.  The 
recent  high  cost  of  living  has  greatly  stimulated 
interest  in  the  cooperative  movement;  and  John 
Graham  Brooks  reports  that  we  have  already 
about  350  local  distributive  societies.  The  move- 
ment toward  federation  is  progressing.  There 
are  over  100  cooperative  stores  in  Minnesota, 
Wisconsin  and  other  Northwestern  states,  many 
of  which  were  organized  by  or  through  the  zealous 
work  of  Mr.  Tousley  and  his  associates  of  the 
Right  Relationship  League  and  are  in  some  ways 
affihated.  In  New  York  City  83  organizations 
are  affihated  with  the  Cooperative  League.  In 
New  Jersey  the  societies  have  federated  into  the 
American  Cooperative  Alliance  of  Northern  New 
Jersey.  In  California,  long  the  seat  of  effective 
cooperative  work,  a  central  management  com- 


2U         OTHER  PEOPLE'S  MONEY 

mittee  is  developing.  And  progressive  Wisconsin 
has  recently  legislated  wisely  to  develop  coopera- 
tion throughout  the  state. 

Among  our  farmers  the  interest  in  cooperation 
is  especially  keen.  The  federal  government  has 
just  established  a  separate  bui-eau  of  the  Depart- 
ment of  Agriculture  to  aid  in  the  study,  devel- 
opment and  introduction  of  the  best  methods 
of  cooperation  in  the  working  of  farms,  in  buj'ing, 
and  in  distribution;  and  special  attention  is  now 
being  given  to  farm  credits — a  field  of  coopera- 
tion in  which  Continental  Europe  has  achieved 
complete  success,  and  to  which  David  Lubin, 
America's  delegate  to  the  International  Institute 
of  Agriculture  at  Rome,  has,  among  others,  done 
much  to  direct  our  attention. 

people's  savings  banks 

The  German  farmer  has  achieved  democratic 
banking.  The  13,000  little  cooperative  credit 
associations,  with  an  average  membership  of 
about  90  persons,  are  truly  banks  of  the  people, 
by  the  people  and  for  the  people. 

First:  The  banks'  resom'ccs  are  of  the  people. 
These  aggregate  about  $500,000,000.  Of  this 
amount  S375, 000,000  represents  the  farmers' 
savings  deposits;  $50,000,000,  the  farmers'  cur- 


THE  OLIGARCH  INEFFICIENT     215 

rent  deposits;  $0,000,000,  the  farmers'  share 
capital;  and  $13,000,000,  amounts  earned  and 
placed  in  the  reserve.  Thus,  nearly  nine-tenths 
of  these  large  resources  belong  to  the  farmers — 
that  is,  to  the  members  of  the  banks. 

Second:  The  banks  are  managed  by  the  people 
— that  is,  the  members.  And  membership  is 
easily  attained;  for  the  average  amount  of  paid- 
up  share  capital  was,  in  1909,  less  than  $5  per 
member.  Each  member  has  one  vote  regardless 
of  the  number  of  his  shares  or  the  amount  of 
his  deposits.  These  members  elect  the  officers. 
The  committees  and  trustees  (and  often  even, 
the  treasurer)  serve  without  pay :  so  that  the  ex- 
penses of  the  banks  are,  on  the  average,  about 
$150  a  year. 

Third:  The  banks  are  for  the  people.  The 
farmers'  money  is  loaned  by  the  farmer  to  the 
farmer  at  a  low  rate  of  interest  (usually  4  per 
cent,  to  6  per  cent.);  the  shareholders  receiving, 
on  their  shares,  the  same  rate  of  interest  that 
the  borrowers  pay  on  their  loans.  Thus  the 
resources  of  all  farmers  are  made  available  to 
each  farmer,  for  productive  purposes. 

This  democratic  rural  banking  is  not  confined 
to  Germany.  As  Henry  W.  Wolff  says  in  his 
book  on  cooperative  banks: 


216         OTHER  PEOPLE'S  MONEY 

"Propagating  themselves  by  their  own  merits, 
little  people's  cooperative  banks  have  overspread 
German}',  Italy,  Austria,  Hungary,  Switzerland, 
Belgium.  Russia  is  following  up  those  countries; 
France  is  striving  strenuously  for  the  possession 
of  cooperative  credit.  Servia,  Roumania,  and 
Bulgaria  have  made  such  credit  their  own. 
Canada  has  scored  its  first  success  on  the  road  to 
its  acquisition.  Cyprus,  and  even  Jamaica,  have 
made  their  first  stai't.  Ireland  has  substantial 
first-fruits  to  show  of  her  economic  sowings. 

"South  Africa  is  groping  its  way  to  the  same 
goal.  Egypt  has  discovered  the  necessity  of 
cooperative  banks,  even  by  the  side  of  Lord 
Cromer's  pet  creation,  the  richly  endowed  'agri- 
cultural bank.'  India  has  made  a  begin- 
ning full  of  promise.  And  even  in  far  Japan, 
and  in  China,  people  ai'e  trying  to  acclimatize 
the  more  perfected  organizations  of  Schulze- 
Delitzsch  and  Rafi'eisen.  The  entire  world 
seems  girdled  with  a  ring  of  cooperative  credit. 
Only  the  United  States  and  Great  Britain  still 
lag  lamentably  behind." 

bankers'  savings  banks 

The  saving  banks  of  America  present  a  striking 
contrast  to  these  democratic  banks.     Our  savings 


THE  OLIGARCH  INEFFICIENT     217 

banks  also  have  performed  a  great  service.  They 
have  provided  for  the  people's  funds  safe  deposi- 
tories with  some  income  return.  Thereby  they 
have  encouraged  thrift  and  have  created,  among 
other  things,  reserves  for  the  proverbial  "rainy 
day."  They  have  also  discouraged  "old  stock- 
ing" hoarding,  which  diverts  the  money  of  the 
country  from  the  channels  of  trade.  American 
savings  banks  are  also,  in  a  sense,  banks  oj  the 
people;  for  it  is  the  people's  money  which  is 
administered  by  them.  The  $4,500,000,000  de- 
posits in  2,000  American  savings  banks  belong  to 
about  ten  million  people,  who  have  an  average 
deposit  of  about  $450.  But  our  savings  banks 
are  not  banks  hy  the  people,  nor,  in  the  full 
sense,  jor  the  people. 

First:  American  savings  banks  are  not  man- 
aged by  the  people.  The  stock-savings  banks, 
most  prevalent  in  the  Middle  West  and  the 
South,  are  purely  commercial  enterprises,  man- 
aged, of  course,  by  the  stockholders'  representa- 
tives. The  mutual  savings  banks,  most  prevalent 
in  the  Eastern  states,  have  no  stockholders;  but 
the  depositors  have  no  voice  in  the  management. 
The  banks  are  managed  by  trustees /or  the  people, 
practically  a  self-constituted  and  self-perpetuat- 
ing body,  composed  of  "leading"  and,  to  a  large 


218  OTHER  PEOPLE'S  MONEY 

extent,  public-spirited  citizens.  Among  them 
(at  least  in  the  larger  cities)  there  is  apt  to  be  a 
predominance  of  investment  bankers,  and  bank 
directors.  Thus  the  three  largest  savings  banks 
of  Boston  (whose  aggregate  deposits  exceed 
those  of  the  other  18  banks)  have  together  81 
trustees.  Of  these,  52  are  investment  bankers  or 
directors  in  other  Massachusetts  banks  or  trust 
companies. 

Second:  The  funds  of  our  savings  banks 
(whether  stock  or  purely  mutual)  are  not  used 
mainly  for  the  people.  The  depositors  are 
allowed  interest  (usually  from  3  to  4  per  cent.). 
In  the  mutual  savings  banks  they  receive  ulti- 
mately all  the  net  earnings.  But  the  money 
gathered  in  these  reservoirs  is  not  used  to  aid 
productively  persons  of  the  classes  who  make 
the  deposits.  The  depositors  are  largely  wage 
earners,  salaried  people,  or  members  of  small 
tradesmen's  families.  Statically  the  money  is 
used  for  them.  Dynamically  it  is  used  for  the 
capitalist.  For  rare,  indeed,  are  the  instances 
when  savings  banks  moneys  are  loaned  to  ad- 
vance productively  one  of  the  depositor  class. 
Such  persons  would  seldom  be  able  to  provide 
the  required  security;  and  it  is  doubtful  whether 
their  small  needs  would,  in  any  event,  receive 


THE  OLIGARCH  INEFFICIENT     219 

consideration.  In  1912  the  largest  of  Boston's 
mutual  savings  banks — the  Provident  Institu- 
tion for  Savings,  which  is  the  pioneer  mutual 
savings  bank  of  America — managed  $53,000,- 
000  of  people's  money.  Nearly  one-half  of  the 
resources  ($24,262,072)  was  invested  in  bonds — 
state,  municipal,  railroad,  railway  and  telephone 
and  in  bank  stock;  or  was  deposited  in  national 
banks  or  trust  companies.  Two-fifths  of  the 
resources  ($20,764,770)  were  loaned  on  real 
estate  mortgages;  and  the  average  amount  of 
a  loan  was  $52,569.  One-sevefith  of  the  re- 
sources ($7,566,612)  was  loaned  on  personal 
security;  and  the  average  of  each  of  these  loans 
was  $54,830.  Obviously,  the  ''small  man"  is 
not  conspicuous  among  the  borrowers;  and  these 
large-scale  investments  do  not  even  serve  the 
individual  depositor  especially  well;  for  this 
bank  pays  its  depositors  a  rate  of  interest  lower 
than  the  average.  Even  our  admirable  Postal 
Savings  Bank  system  serves  productively  mainly 
the  capitalist.  These  postal  saving  stations 
are  in  effect  catch-basins  merely,  which  collect 
the  people's  money  for  distribution  among  the 
national  banks. 


220         OTHER  PEOPLE'S  MONEY 

PROGRESS 

Alphonse  Desjardins  of  Levis,  Province  of 
Quebec,  has  demonstrated  that  cooperative  credit 
associations  are  appHcable,  also,  to  at  least 
some  m-ban  communities.  Levis,  situated  on  the 
St.  Lawrence  opposite  the  City  of  Quebec,  is  a 
city  of  8,000  inhabitants.  Desjardins  himself  is 
a  man  of  the  people.  Many  years  ago  he  became 
impressed  with  the  fact  that  the  people's  savings 
were  not  utilized  primarily  to  aid  the  people  pro- 
ductively. There  were  then  located  in  Levis 
branches  of  three  ordinary  banks  of  deposit — a 
mutual  savings  bank,  the  postal  savings  bank, 
and  three  incorporated  "loaners";  but  the  peo- 
ple were  not  served.  After  much  thinking,  he 
chanced  to  read  of  the  European  rural  banks. 
He  proceeded  to  work  out  the  idea  for  use  in 
Levis;  and  in  1900  established  there  the  first 
"credit-union."  For  seven  years  he  watched 
carefully  the  operations  of  this  little  bank. 
The  pioneer  union  had  accumulated  in  that 
period  SSO,000  in  resources.  It  had  made  2900 
loans  to  its  members,  aggregating  $350,000;  the 
loans  averaging  SI 20  in  amount,  and  the  interest 
rate  6  1/2  per  cent.  In  all  this  time  the  bank 
had  not  met  with  a  single  loas.     Then  Desjardins 


THE  OLIGARCH  INEFFICIENT     221 

concluded  that  democratic  banking  was  appli- 
cable to  Canada;  and  he  proceeded  to  establish 
other  credit-unions.  In  the  last  5  years  the 
number  of  credit-unions  in  the  Province  of 
Quebec  has  grown  to  121;  and  19  have  been 
established  in  the  Province  of  Ontario.  Des- 
jardins  was  not  merely  the  pioneer.  All  the 
later  credit-unions  also  have  been  established 
through  his  aid;  and  24  applications  are  now  in 
hand  requesting  like  assistance  from  him.  Year 
after  year  that  aid  has  been  given  without  pay 
by  this  public-spirited  man  of  large  family  and 
small  means,  who  lives  as  simply  as  the  ordi- 
nary mechanic.  And  it  is  noteworthy  that  this 
rapidly  extending  system  of  cooperative  credit- 
banks  has  been  established  in  Canada  wholely 
without  government  aid,  Desjardins  having 
given  his  services  free,  and  his  travelling 
expenses  having  been  paid  by  those  seeking  his 
assistance. 

In  1909,  Massachusetts,  under  Desjardin's 
guidance,  enacted  a  law  for  the  incorporation  of 
credit-unions.  The  first  union  established  in 
Springfield,  in  1910,  was  named  after  Herbert 
Myrick— a  strong  advocate  of  cooperative  finance. 
Since  then  25  other  unions  have  been  formed; 
and  the  names  of  the  unions  and  of  their  officers 


222  OTHER  PEOPLE'S  MONEY 

disclose  that  11  are  Jewish,  8  French-Canadian, 
and  2  Italian — a  strong  indication  that  the 
immigrant  is  not  unprepared  for  financial  de- 
mocracy. There  is  reason  to  believe  that  these 
people's  banks  will  spread  rapidlj^  in  the  United 
States  and  that  they  will  succeed.  For  the 
cooperative  building  and  loan  associations,  man- 
aged by  wage-earners  and  salarj^-earners,  who 
joined  together  for  systematic  saving  and  owner- 
ship of  houses — have  prospered  in  many  states. 
In  Massachusetts,  where  they  have  existed  for 
35  years,  their  success  has  been  notable — the 
number,  in  1912,  being  162,  and  their  aggregate 
assets  nearl}^  $75,000,000. 

Thus  farmers,  workingmen,  and  clerks  are 
learning  to  use  their  little  capital  and  their  sav- 
ings to  help  one  another  instead  of  turning  over 
their  money  to  the  great  bankers  for  safe  keep- 
ing, and  to  be  themselves  exploited.  And  may 
we  not  expect  that  when  the  cooperative  move- 
ment develops  in  America,  merchants  and  manu- 
facturers will  learn  from  farmers  and  working- 
men  how  to  help  themselves  by  helping  one 
another,  and  thus  join  in  attaining  the  New  Free- 
dom for  all?  When  merchants  and  manufacturers 
learn  this  lesson,  money  kings  will  lose  subjcM'ts, 
and  swollen  fortunes  may  siu'ink;  but  industries 


THE  OLIGARCH  INEFFICIENT     223 

will  flourish,  because  the  faculties  of  men  will  be 
liberated  and  developed. 

President  Wilson  has  said  wisely: 

"No  country  can  afford  to  have  its  prosperity 
originated  by  a  small  controlling  class.  The 
treasury  of  America  does  not  lie  in  the  brains  of 
the  small  body  of  men  now  in  control  of  the 
great  enterprises.  ...  It  depends  upon  the 
inventions  of  unknown  men,  upon  the  originations 
of  unknown  men,  upon  the  ambitions  of  unknown 
men.  Every  country  is  renewed  out  of  the  ranks 
of  the  unknown,  not  out  of  the  ranks  of  the 
already  famous  and  powerful  in  control." 


THE    END 


0) 


kJ 


University  of  California 

SOUTHERN  REGIONAL  LIBRARY  FACILITY 

305  De  Neve  Drive  -  Parking  Lot  17   .  Box  951388 

LOS  InGELES,  CALIFORNIA  90095-1388 

Return  this  material  to  the  library  from  which  it  was  borrowed. 


4t 


^0)/ 


0 


J^ 


3  1970  00068  5229 


UC  SOUTHERN  REGIONAL  LIBRARY  FACILITY 


AA    001  258  678  o 


I 


